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Did WPP's Debt Problems Trigger 90 Layoffs at Ogilvy?

The 90 Ogilvy & Mather staffers who are about lose their jobs should be forgiven for being baffled about what is happening to them. After all, judging by CEO John Seifert's message to his troops, the ad agency has won more business than it has lost recently and Q4 business is looking up. Even WPP (WPPGY) CEO Martin Sorrell -- Ogilvy's ultimate corporate chieftain -- is predicting flat revenues in 2010. So why should the shop need to shed 4 percent of its staff?

The answer can be summed up in a single word: Debt.

The state of WPP's credit has been a burning issue all year (see related stories below), and one way to improve its rating on Wall Street -- and keep its stock up -- is to cut costs. At agencies, 70 percent of costs are jobs. So those newly jobless Ogilvy staff may be losing their livelihoods not because Ogilvy's client billings are being hammered but because Sorrell needs to keep the price of his access to credit down.

Here's Seifert's memo:

Despite recent new-business wins, and an uptick in our fourth-quarter financial performance, we are taking this action in response to our clients' latest guidance and a cautious outlook for our business generally in 2010...
Seifert (pictured) also blamed procurement, the ad biz's catchall devil du jour:
We continue to experience delays -- and some significant cuts -- in client spending across all business sectors. We also face continued pressure on pricing, where client procurement departments are challenging every aspect of our industry's economics, including: salaries, overhead rates and acceptable profit margins. Even incentive compensation on superior performance results is being squeezed.
Ad Age points out that Ogilvy has lost some business this year. But compare those to the wins mentioned by Seifert:
  • Losses: Yahoo, Kraft, Barclays iShares
  • Wins: UPS, CDW, Sara Lee, Pfizer, Bayer, Kimberly-Clark
On that basis, Ogilvy is an agency I'd be sending a resume to, not one to avoid. And Sorrell told Reuters he predicted a flat market in 2010, not more declines. So what's going wrong at Ogilvy?

It's the debt picture. WPP is loaded up with it after the acquisition of market research/measurement firm TNS. (Adscam's George Parker reminds me that Ogilvy won CDW from another WPP shop, JWT, and therefore it had no effect on WPP's income to debt ratio.) BNET noted in September that WPP's debt was ranked at the brink of junk status. The Independent recently noted that:

... both Standard & Poor's and Moody's switched the outlook on their respective ratings for WPP to negative ...

... management may consider cutting back on capital expenditure or on the dividend instead of issuing equity.

The other way to raise your credit rating is to lower costs and thus improve cashflow. Hence job cuts. Expect the ratings agencies to react in the next few months.
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