) in January, 2001, advertising veteran John J. Dooner Jr. celebrated by making a blockbuster acquisition. His $2.1 billion deal for True North Communications Inc. (TNO
), parent of mega-agency FCB Worldwide, vaulted IPG into the top rank of global ad concerns. Why bulk up at a time when the economy was softening and IPG was $2 billion in debt following a frenzied acquisition spree? "Great clients, great people, and a shared vision for the future," Dooner declared.
Less than two years later, some of the great clients have fled, hundreds of the great people have been laid off, and an accounting scandal at the flagship McCann-Erickson WorldGroup agency threatens to put Dooner's grand ambitions on hold. With IPG's stock off 20%, to $14, since the accounting irregularities surfaced in August, investors and insiders are asking whether Dooner is doing enough to contain the damage--and whether his grand vision of building a global-advertising supermarket can be realized. Says an exec at one IPG agency: "These people don't know how to manage their business."
Nor, for that matter, do they appear to know how to manage a crisis. Since August, Dooner has been forced to restate earnings three times as more accounting problems have been uncovered. The steady trickle of unwelcome news has trashed Dooner's credibility. The latest example: In mid-November, Dooner announced that earnings going back to 1997 would have to be restated to the tune of $181.3 million, up from earlier estimates of $68.5 million. The Securities & Exchange Commission has also launched an informal probe into the numbers. Even more worrisome, with $44 million of the restatement stemming from other subsidiaries, the company has for the first time conceded that the accounting woes went beyond McCann. "If they didn't have formal processes to handle this issue at McCann," says David Doft, executive director of equity research at CIBC World Markets, "who's to say they have them to handle other issues?"
A chastened Dooner is scrambling to reassure investors. He has slowed the pace of acquisitions and dismissed about a dozen senior execs. And he's looking for a chief operating officer to oversee global operations. That's crucial to buttressing adept rainmaker Dooner in an area where he's weak, says Greg Jackson, portfolio manager at Oakmark Global Fund, which owns 750,000 IPG shares. Clearly, it's an area where IPG needs work: The company says the accounting troubles occurred because different offices simultaneously booked the same earnings.
Beyond that, Dooner & Co. must quickly get their financial house in order. To bring costs down, more staff cuts are coming, and redundant offices likely will be closed. Investors will also be watching to see how the company deals with nearly $578 million in debt that matures in December, 2003. While IPG hopes to reschedule the loans by mid-January, lenders could impose higher interest rates on any new loans, as well as restrictions on acquisitions, capital expenditures, and dividend payouts. Meantime, IPG's debt rating is hovering near junk.
The mishaps have also raised questions about whether Dooner's strategy to become a global-marketing supermarket is working. For now, industry observers say it still makes sense because clients want a range of services on an international scale. The problem is that IPG has been unable to digest the acquisitions or squeeze out synergies. Moreover, like its rivals, IPG ventured into areas it didn't understand, including the money-losing London-based sports management agency, Octagon. If it doesn't get more adept at managing its many units soon, pressures to slim down will increase.
Dooner's job seems safe for now. IPG recently won some big new clients, including Bank of America. And investors don't entirely blame him. "Most of what he's dealing with are legacy issues," says Jackson. But if he doesn't start to rebuild his credibility--and the company's--soon, that could change, too. By Gerry Khermouch in New York