Interpublic Group Update

Today, Interpublic Group's (IPG) management presented a much-awaited update on their business situation. IPG is one of the largest ad agencies in the world, owning such shops as McCann-Eriksonn and Foote, Cone and Belding and receiving over $6 billion in revenues. The ad industry is attractive to investors because capital requirements are fairly low while the operating margins are fairly high - at around 15%. With a return to these industry norms, IPG could see its stock price double, in a likely valuation move from 0.6 of sales to 1.2 times sales. Why is the stock price so depressed?

Many trace IPG's woes to its rapid growth. During the 1990s, IPG went on an acquisition spree, acquiring over 300 companies. In order to finance these acquisitions, IPG issued ample amounts of stock and also borrowed money. But it was not alone. Omnicom (OMC) and WPP Group (WPPGY) used the same approaches. Why did major problems emerge for IPG and not OMC or WPPGY?

One clue is in the overdue and recently released (9/30/2005) 2004 10K for IPG. In this 414 page report (roughly double the size of a large 10K), the auditor states, "the scope of our work was not sufficient to enable us to express, and we do not express, an opinion..on..internal control over financial reporting as of December 31, 2004." Internal controls are critical as they give rise to the reliability of a financial report. The report goes on to list an unheard of eighteen areas of deficiencies in controls.