BUSINESS, Page 66Sibling SetbacksAfter 19 years of spectacular growth, the world's largestadvertising firm seeks a savior to halt a precipitous slidein earningsBy 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increasingly withdrawn from the firm's day-to-day oversight.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
