Omnicom Stock Plunges on Accounting Questions

Ad agency conglomerate Omnicom Group executives fired back Wednesday at questions raised in a Wall Street Journal story concerning the holding company’s accounting — including the handling of its recent reorganization of interactive shops — which had sparked a major sell-off earlier in the day.

By the time that Omnicom Chief Executive John Wren and Chief Financial Officer Randall Weisenburger announced a conference call to respond to the story that ran Wednesday morning, investors had sent shares of the New York-based company down 26 percent on record-setting volume to $57.30.

The Journal story addressed “Omnicom’s long list of acquisitions — 73 in 2000 and 2001 alone — and the way it accounts for them,” suggesting that the company was aggressive in calculating both payments for and revenue from the purchases.

According to the piece, the company’s accounting tactics ensured that payouts to acquired companies’ owners were made over time and tucked away, out of the sight of bottom-line results. Revenues from the acquired agencies were counted immediately, however, which is unlike how most of Omnicom’s peers account for their purchases.

The piece also suggested that Omnicom management skirted its board of directors in receiving the proper approval for deals such as the April 2001 creation of Seneca Investments — a spin-off of Omnicom’s stakes in a number of private and publicly-held interactive agencies. Such concerns, according to the Journal, promoted at least one resignation from the company’s board.

Seneca, formed in partnership with venture capital firm Pegasus Partners, had absorbed Omnicom’s shares in a number of struggling interactive agencies, including Razorfish , Organic and Agency.com. The Journal piece suggested the unit had been created to shield the parent company from the i-shops’ losses.

But during a conference call with analysts and investors Wednesday afternoon, Weisenburger said he felt the article was biased and didn’t reflect the information the company provided when questions over how it handled some of its investments were raised.

During the call, Wren too repeatedly disputed the article, saying the company has never tried to shift charges “over the side.”

“We feel there are numerous inaccuracies and some improper innuendos,” he said. “We can’t go each and every one of the inaccuracies, because there are many … There is nothing, I believe, that is news to anyone who follows us in which was written this morning. The only thing new is innuendo.”

Wren specifically attacked the notion that Seneca had been engineered to hide losses from the interactive agencies in which Omnicom — which has never had a write-down — was an investor.

“It was a very sound business structure and strategy that led to the formation of Seneca, and it worked,” he said. “It has been reviewed and authorized by the board … in an appropriate manner … The board is in full support of management’s actions concerning Seneca.”

Wren added that the company was already focused on clear and ethical accounting, pointing to recent changes made at the company to limit the number of insiders that sit on the company’s board of directors. But he said Omnicom would take further steps to enhance visibility into its accounting.

For one thing, Wren said the company will take greater steps to disclose its participation and the bottom-line impact when one if its subsidiary agencies, which include DDB Worldwide and BBDO Worldwide, makes an acquisition. He also said Omnicom’s agencies’ Web sites would better reflect their affiliation to their parent.

But he suggested that the mood in the markets — prompted by widening federal probes into other companies following the Enron accounting scandal — might be fueling an overreaction to the Journal piece. Even a rumor that a story was in the works caused a brief sell-off last week.

“We’ll do whatever we need to do, going forward, to rebuild confidence we have lost as a result of this article,” Wren added.