• by John Gaffney , May 16, 2003

Is the ad agency business headed toward another round of consolidation? That's the question being asked after Havas and Publicis posted less than stellar results last week.

Those results were overshadowed in the news by a busy week of upfront announcements. However, Havas, controllers of EURO/RSCG, MPG and Arnold checked in with a six percent loss for Q1. Publicis, controllers of ZenithOptimedia and StarcomMediavest, showed a slight decrease compared to last year's quarter. With the pressure on realizing some profit from the holding company model higher than ever, some industry observers think a round of consolidation may be in the offing.

"This model was formed to produce more acquisitions or it was intended to maximize business development," said Ralph Cutcher, principal of marketing consultancy Rojek Cutcher and an agency business veteran. "Now it's a no growth business. Acquisitions have settled in. So I think its time for these companies to seek even more consolidation."

The last round of consolidation came exactly one month ago. A day after announcing a relatively successful Q1, WPP Group combined all of its media agencies into a new division called Group M. Group M, will operate MindShare and Mediaedge:cia and all other brands. MindShare and Mediaedge:cia will report into WPP through Group M with each retaining separate management. The advantage being that the two groups can combine buying strengths when its convenient for non-competitive clients.

While Cutcher and others feel its inevitable that Havas and Publicis will "sharpen their pencils" not all observers think consolidation is inevitable. First, the ultimate goal is to keep current clients happy. And if any perceived conflicts results from consolidating divisions, so holding company CEO will risk a client loss. Also, several holding company CEOs, including Publicis Maurice Levy, have held out hope for a North American comeback before the year is out. That could exclude US divisions from potential cuts.

James Maskulka, professor of marketing at Lehigh University, believes holding company management will err on the side of serving the client. He doesn't believe aggressive profit drive will lead to quick or excessive cuts. The financial sense, he says, has to make financial sense for the client.

"Everybody, even these huge holding companies, has to be aware of where they are," Maskulka says. "It's in the best interest for every advertising agency to make sure there's still room for fresh ideas. If they have to make new deals or reorganize within themselves, they have to measure how that will jeopardize their priorities. And that priority is the client."