Why Isn't Digitas Growing Fast Enough to Absorb Its Layoffs?

(MoneyWatch)  The layoffs of 2 percent of Digitas' staff raises the question of whether Publicis paid too much -- $1.3 billion -- to acquire the digital ad agency network in 2006. Most of the reports have focused, rightly, on the fact that Digitas client General Motors is likely to abandon or downsize the Saab, Pontiac and Saturn brands.

But with the online ad economy still growing at a pace of 11 percent this year, why was Digitas unable to absorb staff into its other accounts? Digitas pr rep Belle Lenz of DiGennaro Communications confirmed they couldn't do that:

We have redeployed talent wherever possible, but the realities of the current economy did require that we let some talented people go in order to best position the agency for continued growth and success.

Publicis reported in its Q3 earnings that 14 percent of its revenue was dependent on automotive, and that growth at Digitas worldwide was 17.7 percent. The layoffs suggest that Digitas became too heavily dependent on Detroit for its fortunes -- cars account for about $100 million of Digitas' billings. Back in 2006, with the real estate bubble inflating assets everywhere and gas prices relatively low, the $1.3 billion price tag on Digitas must have looked cheap. Or, at least, looked cheap to anyone who believed that asset prices always rise and gas prices always fall ...

Since then, the proportional costs of Digitas have only increased. The agency lost its Kraft business. It's involved in the pitch of a lifetime for the Wal-Mart digital business. And Publicis continues to roll out the brand globally with acquisitions in the U.K., India and Singapore in 2007, and into China via its acquisition of CCG, and France via its acquisition of Interactif. Those things don't come cheap. And Publicis likes to squeeze more from its offices than rival networks like WPP or Interpublic, so doing redundant staff favors by giving them make-work tasks until new business comes in just isn't part of the Publicis plan.

So the answer to why Digitas is not growing fast enough to absorb its own losses could be that the acquisition costs Publicis is paying are consuming the very growth it is hoping to buy, at least in the short term.