TIME: Almanac 1993/TIME Almanac 1993.iso/time/122589/12258900.010

Text File | 1992-09-23 | 9.1 KB | 179 lines

                                                                                BUSINESS, Page 66

Sibling Setbacks


After 19 years of spectacular growth, the world's largest
advertising firm seeks a savior to halt a precipitous slide in
earnings

By Janice Castro


    For nine months advertising giant Saatchi & Saatchi has
admitted that it was enduring a rough year. But when chairman
Maurice Saatchi faced investment analysts in the company's
luxurious London boardroom two weeks ago, the news was far
worse than anyone had feared. After 19 years of uninterrupted
growth, Saatchi's pretax profits for 1989 collapsed, dropping
from $217 million last year to just $34 million, an 84% decline.
After taxes and other provisions were deducted, the world's
largest advertising firm reported its first net loss, of $92
million.

    How could a firm long heralded for its go-go brilliance
stumble so badly? Somehow the company that transformed the
advertising industry worldwide during the 1980s seems to have
lost its alchemist's touch. Deepening the management mystery,
Saatchi & Saatchi profits fell while its global advertising
business continued to thrive: the company's revenues reached
$1.5 billion this year, up from $1.35 billion in 1988.

    Industry and financial experts could only conclude that the
problem lay with the company's founders, brothers Charles and
Maurice Saatchi. Over the past four years, both men have
increasingly withdrawn from the firm's day-to-day oversight.
Charles, 46, has spent much of his time becoming one of the
world's most voracious art collectors, sometimes buying entire
exhibitions at a single gulp. Now he is unloading scores of
works at the hyperprices his frenetic buying helped create.
Maurice, 43, though not as aloof as his sibling, spends less and
less time with Saatchi & Saatchi employees and clients. Says the
chief of a rival advertising firm: "You can't run an agency by
remote control."

    The Saatchis seem to have reached the same conclusion. In
October the brothers announced that they were in effect
demoting themselves and bringing in new management to salvage
the firm. Their choice for savior: Frenchman Robert
Louis-Dreyfus, 43, former president of IMS International, a New
York City-based pharmaceutical and marketing firm.
Louis-Dreyfus, a Harvard Business School graduate, will take
over as Saatchi & Saatchi's chief executive on Jan. 1. Maurice
will retain the title of chairman, and Charles will continue as
the company's executive director.

    Louis-Dreyfus has no background in advertising but has
earned a hot reputation as a financial whiz. His chief
accomplishment is the brisk turnaround of IMS. The company,
capitalized at $232 million when Louis-Dreyfus took over in
1982, was sold to Dun & Bradstreet last year for $1.7 billion.

    By hiring Louis-Dreyfus, the Saatchis have harked back to
the skill that transformed their small agency in London's Soho
district into an international behemoth: hard-nosed financial
know-how. The Iraqi-born brothers convinced London investors a
decade ago that the ad business was an intriguing play. The
logic of global corporate expansion, they argued, demanded an
agency that could provide one-stop shopping for multinational
firms interested in advertising and marketing services that
stretched from Asia to North America to Europe. Such an agency
could help companies build worldwide markets for their brands
and could reap extra profits from efficiencies of scale.

    Investors agreed. They flocked to place money with the
brothers, who had earned a reputation for creativity and
bareknuckle competitiveness in the genteel British ad market.
The Saatchis went on a billion-dollar spree that sparked panic
on then complacent Madison Avenue and helped fuel a merger
frenzy as other agencies joined forces to stay in the game.
Meanwhile the brothers bought and bought. Among the dozens of
U.S. firms they scooped up were top names like Compton
Communications (purchased in 1982 for $55 million), Dancer
Fitzgerald Sample (1986, $75 million) and Backer & Spielvogel
(1986, $100 million).

    From 1982 to 1986, Saatchi & Saatchi revenues increased
more than elevenfold, from $62 million to $697 million. In 1986,
with the $450 million purchase of the Ted Bates agency, the
brothers reached their avowed goal: Saatchi & Saatchi was the
world's biggest ad firm. By last year, their client billings had
reached $13.5 billion (runner-up Interpublic billed $8.4
billion), and the company had offices in 58 countries.

    Until the brothers hit the apex of the ad world, no one
questioned their claim to have a grand strategy that would turn
their empire into a finely tuned global machine. But the first
crack in that facade occurred in January 1986, just two months
before the purchase of Bates, when longtime finance chief
Martin Sorrell departed to start his own agency. Sorrell, who
had grown restive as a Saatchi subordinate, has since assembled
an agency group, WPP, with annual revenues of $1.2 billion.
Close observers of Saatchi & Saatchi date the firm's financial
drift from Sorrell's departure. Says a marketing executive in
London: "He guided them. When he left, they did not know how to
do it."

    The Saatchis soon learned that bulk can have its downside.
Many advertisers objected to being crowded into the same
corporate tent with rival products. Colgate-Palmolive, Procter
& Gamble, Warner-Lambert and other major firms have pulled
nearly $600 million worth of accounts from Saatchi-owned
agencies since 1986.

    To halt the exodus, the Saatchis divided their advertising
empire into two separate international networks. Backer &
Spielvogel was merged with Ted Bates, while Dancer Fitzgerald
Sample and Compton were combined to form Saatchi & Saatchi
Worldwide. Says Carl Spielvogel, chairman of the merged Backer
Spielvogel Bates network: "We don't cooperate with the other
network in any way. We compete for the same clients."
Simultaneously, lesser Saatchi-owned agencies were arranged in
smaller groups.

    In some cases, the global concept succeeded brilliantly.
Typically, a worldwide Saatchi campaign is custom tailored to
the styles and tastes of local markets, though sometimes only
a translation of the ad copy is necessary. The parent firm's
memorable campaign for British Airways, in which the island of
Manhattan is seen coming in for a landing at London's Heathrow
Airport, has run in 40 countries. Customers have liked the
global idea: Saatchi agencies now represent more than 100
clients in five or more countries, including Fisher-Price toys
and Allied-Lyons foods.

    In 1988, however, investors grew nervous as the Saatchis
began building a new kingdom in the consulting business. The
move continued the company's record of steep revenue growth
through acquisition. During 1988 alone, the company purchased
17 consulting firms, branching out into such new areas as market
research and executive recruiting.

    But as Saatchi & Saatchi wandered afield, its management
seemed to become increasingly inept. The company's debt swelled
to $250 million while costs mounted unchecked. At the consulting
firms, key managers, skeptical about whether their operations
could thrive in the Saatchi confederacy, began to quit.

    Maurice finally sounded a tocsin last March, warning that
profits would decline for at least the first half of 1989. He
also announced plans to sell off much of the firm's $360
million consulting investment. Calling the move "ham-handed,"
Alan Gottesman, an advertising analyst at the Paine Webber
brokerage firm, noted that Maurice "managed to depress morale
and performance in the consulting arm at the same time that he
was letting potential buyers know they could pick up the firms
at a discount." Fearing a messy auction, clients began to switch
to other consulting agencies. So far, only three of the smaller
agencies have been sold, for a total of $38 million.

    Saatchi management launched an overall restructuring
program. Starting last spring, more than 800 corporate employees
lost their jobs. Plans were laid to close corporate offices in
Washington and to trim operations in New York City and in
London, where the corporate staff last year moved into a glossy
new global headquarters on sedate Berkeley Square. In addition,
five of the firm's twelve directors left. As rumors of further
shake-ups spread, Carl Spielvogel offered in July to buy the
Backer Spielvogel Bates network. Charles Saatchi declined.

    More pain probably lies ahead. Louis-Dreyfus has his work
cut out for him -- and a compensation package geared to inspire
success. On top of a reported salary of $785,000, Louis-Dreyfus
will control stock options worth at least $3 million. That
value will rise substantially if he does his job well. Earlier
this month, Louis-Dreyfus pledged to boost the value of the
company's shares, which have traded as high as $10.70, from
their current price of $4 to at least $7.85 within three years.
More than another increase in its global reach, that is the kind
of growth figure that Saatchi & Saatchi now badly needs.