Building a strong network

Moderate growth, accompanied by acquisitions, defined last year. Firms are moving toward more micro, tactical positioning in 2012.

Moderate growth, accompanied by acquisitions, defined last year. As Alex Palmer learns, firms are moving toward more micro, tactical positioning in 2012.

While 2011 may have been a sluggish year for the economy overall, the PR sector's leading holding companies generally boasted solid returns, with digital becoming a more central focus for all. Not only was this good news for the agencies in the short term, but it also could quiet skeptics who question whether such large-scale organizations remain as vital in a more immediate and personalized digital age.
All the major holding companies saw revenues rise for the year. WPP Group reported organic revenue growth of 5.3%, with $15.4 billion in total revenue for the full year. Its PR and public affairs revenue rose to $1.4 billion, with 4.6% organic growth. Omnicom Group's full-year revenue for 2011 was $13.9 billion, with a 6.1% organic growth rate. Full-year revenue for its PR properties, including Fleishman-Hillard, Ketchum, and Porter Novelli, increased 6%, to $1.22 billion. Organic growth, though, nudged up only 1.9%.
Publicis Groupe, which does not break out PR revenue, saw organic growth of 5.7% in 2011, with $7.8 billion in revenue. Interpublic Group posted 6.1% organic revenue growth, with $7 billion in annual revenue.
Contributing to overall growth
“We had a very strong year overall,” says Michael Roth, Interpublic Group CEO. “Our PR agencies made a significant contribution to that.” The company's Constituency Management Group, which includes Weber Shandwick, GolinHarris, DeVries, and a number of other PR and event firms, grew 9.8% on an organic basis, outpacing the company as a whole, with total revenue of $1.1 billion for the year.
Roth attributes IPG's strong showing in part to its doubling down on digital. Besides owning digital agencies R/GA and Huge, it has made significant investments in recruiting digital talent across the company. It also recently wrapped up deals with digital agencies in Germany and the UK.
IPG is hardly alone. Across the board, holding company leaders speak of striving to make social, mobile, and digital a seamless part of their offerings.
“2011 was the year in which we believe the historical distinction between so-called ‘traditional' and ‘digital' media disappeared, as we always said it would,” says John Wren, CEO of Omnicom. “Everything we now do has a digital component to it. Social media is just one example not just in the world of PR, but in every one of our businesses.”
CEO Maurice Lévy offers a slightly different take, citing Publicis Groupe's insight into human behavior as its “single greatest strength,” with digital accelerating how such insight can be applied to marketing and PR. Digital accounted for 30.6% of total revenue in 2011, up from 28% in 2010.
“Our clients need agencies who understand people – who know how to strike up a friendship and unfold a brand identity across the whole spectrum of media, from the cinema and website to the palm of your hand,” says Lévy.
By and large, the firms also met their margin goals for the year. Publicis reported an operating margin of 16%, while WPP's headline operating margin was up to 14.3%.
“Both Interpublic and Omnicom delivered the margins that they promised at the start of the year,” adds John Janedis, equity analyst for UBS, who covers those two companies. “Everything for the most part is moving according to plan, even with that sluggish macro backdrop.”
The holding companies have also striven to embrace emerging markets. Publicis has built the MSLGroup to house its PR offer in recent years, expanding its global footprint, particularly in India and China. It also acquired Boston-based Schwartz Communications in September.
In addition to the women-focused American PR powerhouse Marina Maher Communications, Omnicom acquired Mudra Group, one of India's leading integrated marketing communications groups, as well as Turkish affiliates Medina Turgul DDB and DDB & Co. WPP's Cohn & Wolfe expanded its presence in China through the acquisition of independent agency ImpactAsia.
IPG made a number of acquisitions as well, especially in marketing service disciplines in growth regions such as India and Brazil. Roth emphasizes Latin America's well-positioned economies, young and growing demographics, and “explosive rates” of technology adoption as a few of the reasons IPG expects to continue capitalizing on the region.
“Our strength lies undoubtedly in the quality of our teams and our agency model placing digital at the core of all activities and not in a silo like the majority of our competitors,” asserts David Jones, CEO of holding company Havas, which enjoyed 21.4% growth in Latin America for 2011.
Emerging markets
Double-digit growth in Latin America, and near that in the Asia-Pacific region, was something of the norm across the holding companies.

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Martin Sorrell, CEO of WPP since 1986
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Maurice Lévy, CEO of Publicis Groupe since 1987
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Michael Roth, CEO of Interpublic Group since 2005
“Modern marketing solutions that drive business results for our clients”

David Jones, CEO of Havas since 2009
“The world's largest digitally integrated communications group”

“The quality of the work coming out of Latin America is very good – it's like the British invasion in music during the '60s; the Latin American ad agencies really seem to be catching a note as far as the quality of the work that comes out,” says Rich Tullo, director of research at financial consultancy Albert Fried & Co.
While these growing markets offer encouraging opportunities, the eurozone crisis has necessitated caution.
“The economic challenges facing Europe aren't going away soon, but the transition to digital gives us an opportunity to modernize our business and over time access broader marketing budgets,” says Tim Dyson, CEO of holding company Next Fifteen, which, in spite of European market difficulties, enjoyed an 11% organic revenue increase for its 2011 fiscal year, which ended July 31, for total revenue of $113 million.
While southern Europe is a cause for concern, Lévy says Publicis has its attention on the BRIC nations, as well as increased growth in South Africa, Israel, Mexico, and Turkey. Roth cites PR as one of the few specific pockets where he expects to see growth in Europe.
Analysts believe 2012 will be a year in which the major holding companies focus less on large-scale strategic questions and more on smaller tactical concerns. Tullo points to IPG's focus on deleveraging its total debt, reduced from $2.3 billion at the end of 2007 to $1.8 billion by the end of 2011, in order to earn an investment-grade rating from Standard & Poor's.
With some CEOs holding their posts since the late 1980s, there has been industry talk about a need for clearer succession plans. But other industry watchers disagree.
“The people have been there; they're knowledgeable, they're veterans. It's at the agency level where you hear about client turnover and the people coming and going,” says Michael Corty, senior equity analyst for investment research provider Morningstar. “I don't have any reason to think it wouldn't stay like that over the next few years.”
Janedis believes the strong performance from the holding companies overall and their continued growth validates the network agency model.

“As we're seeing more fragmentation in the marketplace and difficulty in reaching the consumer, arguably the agency model actually has more value,” he says. “I'd expect that to be a theme for 2012, 2013, and beyond.”

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