Month: February 2025

After a thumping $1.38bn goodwill write-off, the Japanese holding company presented a frank three-year plan to rebuild its international business. Green Square partner Barry Dudley assesses its chances of success and what it means for Dentsu’s teams around the world. Much like IPG, Dentsu had a tough 2024 in terms of its general trading – organic net revenue fell 0.1%, having fallen 4.9% in 2023. Its operating margin was ahead of expectations, but at 14.8% I would call that pretty ordinary. Hiroshi Igarashi, president and global CEO, Dentsu, said: “The Group FY2024 results were in line with our November guidance with broadly flat organic revenues, and operating margins higher than expectations. We saw sequential quarterly improvement throughout the year, with strong performance in Japan. There were also some notable global new wins in the International business [everything outside Japan].” So, an OK picture. But Igarashi went on to say: “However, we have reported a significant goodwill impairment in the fourth quarter, reflecting a more conservative outlook in EMEA and the Americas. We believe that recognition of these uncertainties will contribute to a sounder balance sheet and a stronger platform upon which to implement the Mid-Term Management Plan announced today.” That goodwill impairment was a lumpy JPY 210.1bn relating to EMEA and the Americas – that’s an eye-watering $1.38bn. There were two headline reasons given: “…a higher discount rate than previously used based on recent market interest rates [going up], secondly conservative reflection of various risks in international businesses.” What sits behind all this? When a business is acquired, very simplistically, the difference between the net assets on its balance sheet and the actual price paid by the acquirer sits on the acquirer’s balance sheet as an intangible asset called goodwill. As most service-based businesses have few “hard assets” (buildings, machinery, IT and the like), the goodwill number is commonly a very big proportion of what is paid by the acquirer. From time to time, the acquirer must review this asset’s carrying value on the balance sheet – is it still worth what they paid for it and is the value still there? If the business is making losses and its future looks tricky then things get harder to justify and some or all of the value may have to be written off. Similarly, if the name of the asset acquired is disappearing, perhaps it is being merged into another business and taking that business’s name – again, is the value still there? I suspect there is a bit of both going on here. As you’d expect, there is a plan. An “MTMP” no less. Igarashi explained: “In our new Mid-Term Management Plan (MTMP), which will run through the years of FY2025 and FY2027, we plan to achieve organic growth of 4% and 16-17% in operating margin in FY2027. We will conduct a thorough review of our core business strengths, be more selective and focused on what we do, and adopt a differentiated strategy to meet our diversifying client needs. “While we will continue to invest in data and technology and our people and culture, we will also invest into areas where we can increase our media capabilities in our key markets. At the same time, we will reevaluate our underperforming businesses and rebuild our business structure. Our ultimate goal is to regain competitiveness and return to a growth trajectory.” I have commented before on the frankness that Dentsu management often use: “Our ultimate goal is to regain competitiveness.” Crikey! Its results were summarized as Japan “performed very well” and the international business was “challenged overall and we are taking this quite seriously.” Got it. And the solution to the seriousness: In 2025, year one of the MTMP, Dentsu will be “focusing on improving profitability through re-evaluating underperforming businesses and rebuilding our business foundation.” During the earnings call there was another piece of frankness from Igarashi when he said that Dentsu didn’t deliver the last MTMP which ended in 2024, which was built on M&A. The new MTMP to 2027 is all about organic growth, with M&A to be “carried out selectively in line with business performance recovery and under strengthened, disciplined management.” The theme continued with a slide saying: “Our position has become increasingly challenging in the face of intensifying competition”, which went on to conclude that Dentsu’s position is “Inferior in terms of network and resource scaling” with “insufficient technology investment.” Then came the inevitable cost reduction plans and the promise of “thoroughly eliminating inefficiencies.” The aim is to reach an operating cost reduction of up to JPY50bn (US$329m) in 2027. The first thing that was mentioned here was to “simplify operations by integrating the Tokyo and London headquarter functions” and then by “redefining the role of regional offices,” in addition to “implementing cost control measures in the markets.” Watch out senior regional management. And what of that pesky AI thing? It was mentioned once in the press release and that was referencing what others are doing in AI. Mentioned the same way in the investor presentation and then just once more within the cost savings: “Extensively automate with AI and systems.” I have a personal affinity to Dentsu which I won’t bore you with. There are many things that make it unique, but I’d say it has a pretty tough time ahead of it – hunkering down and being efficient will only get you so far… Read more

While all eyes are on its impending merger with Omnicom, IPG is still its own business – for now. Barry Dudley delves into its 2024 results to find out what to expect between now and the new holding company empire taking shape. Two weeks ago, we saw some strong 2024 annual results for Publicis and Omnicom with 5.8% and 5.2 % organic growth and 2025 organic growth guidance of 4% to 5% and 3.5% to 4.5% respectively (‘net revenue’ for Publicis, ‘revenue’ for Omnicom). Now we have IPG’s 2024 results and it has had a rather more bumpy ride. Philippe Krakowsky, CEO of IPG, said: “Today we are reporting an organic revenue increase of 20 basis points for the full year 2024, along with adjusted EBITA margin in-line with our forecast of 16.6%. Our strong margin result reflects continued effective operating discipline by our teams, notwithstanding the challenges of the past year. “Solid new business momentum in the fourth quarter and early 2025 will begin to come online later this year, though it will not offset sizable client losses incurred last year due largely to changes in the media trading environment. Factoring in those headwinds, and with the benefit of otherwise sound underlying performance, we are forecasting an organic decrease in revenue for the full year of 1% to 2%.” The “organic revenue increase of 20 basis points” is a somewhat flattering way of saying they grew by just 0.2%. Disappointing for everyone at IPG, there’s no doubt, but given the “sizable client losses incurred last year” I was expecting a much bleaker picture. During the earnings call, Krakowsky said: “…we were on the wrong side of the outcome in defending a number of very significant media accounts … the decisive factor on those largest decisions was principle media, and specifically the commercial terms enabled by principle media at scale.” One of those accounts being Amazon, which IPG had held for many years – WPP and Omnicom shared this prize. That alone would have been bad enough without losing other clients too. The reference to “principle media at scale” and a subsequent comment that “…a competitor was able to leverage its much greater size…” were telling. Even when you’re IPG’s size, you can still be muscled out of business by people even bigger. Scale and price won’t have been the only factors in those pitches, but they matter a lot more in a media pitch than, say, a creative one. But if the sale to Omnicom goes to plan, it will soon be the biggest dog in the neighborhood and will be able to count Amazon as a group client again. I expected profitability to take a hit as well. Rather impressively, IPG delivered an EBITA margin of 16.6% which was in line with forecast. And it has given guidance that it hopes to match this in 2025. Hats off to Krakowsky and CFO Ellen Johnson for marshaling the maths in among this melee of client losses, at the same time as having a coffee or two with Omnicom. And on the math subject, IPG talked through cost-saving and efficiency initiatives with “…in year savings of approximately $250m in 2025” of which there would be “very limited overlap” with the $750m synergy savings that Omnicom referenced could be delivered as a result of acquiring IPG. A shining light, as you might expect, came from Acxiom which “posted good growth for the full year … with four large new business wins across industry sectors”. And another thing that caught my eye was the statement that: “During the quarter, Golin committed to being the first fully AI integrated PR agency by the end of this year.” Can’t wait to see what “fully AI” means, sounds bloody brilliant and at the same time terrifying… But that’s just the world these days. Read more