How a Publicis Acquisition of Interpublic Could Create a $100M Windfall

Publicis (PUB) CEO Maurice Levy recently declined to deny -- again -- that he would consider acquiring the U.S. ad agency holding company Interpublic (IPG). Such a deal, which has long been the subject of speculation, would create a behemoth almost equal in size to WPP (WPPGY), the British colossus that brings in $3.49 billion a quarter in revenues:

"As Michael Roth [the chief executive of Interpublic] put it in an interview, 'There is some logic in such a merger,' " [Levy] says. "For the time being I don't want to take my eyes off the ball. We have a strategy that is quite clear. To make a huge change in the strategy, there has to be some good reason. But I have always considered that it is my duty as chief executive to look at all opportunities."

But another interesting hitch for anyone seeking to acquire IPG would be what to do with roughly $100 million in liabilities sitting on IPG's books from a 2004 accounting scandal, which the company has yet to settle with its clients. In Q3 2010 IPG reported $96.4 million still on its books from the infamous "2004 restatement," when the agency was forced by the SEC to admit it had been booking volume discount credits from media vendors as revenue when in fact the ad airtime credits belonged to the clients whose money had earned them. That $96.4 million liability is down only $10 few million from the year before.

$100 million: Liability or windfall?
If you assume that IPG is negotiating with clients to pay back the money, then those are liabilities that would make IPG about $100 million more expensive to buy -- not an insurmountable sum in the scheme of things.

An alternative scenario is this: The credit liabilities are now so old they may be owed to companies which no longer exist, or -- as IPG notes itself -- the statute of limitations on some contractual requirements may pass. That would mean IPG could end up keeping the money, giving a windfall of $100 million to any acquirer.

Within a year of the 2004 restatement, as IPG went back through its books looking for money it had failed to give to its clients, IPG added up the total amount owed to $284.8 million. That was the highest carrying balance of the credits, after an unknown amount of credit had been passed back to clients in 2004/2005.

Since then, however, IPG has been slow to settle its debts, writing down increasingly small sums each year. I say "writing down," but in fact IPG reserves the right to write them up as well. On page 42 of its 2009 annual report, IPG said that the credits were handled as "other income or expense" depending on settlements with individual clients. It's been more than six years since the restatements began. How long could all those statutes of limitations possibly last?

My point is this: Anyone looking to acquire IPG might want to look closely at the age and contractual detail on those liabilities. They might just turn out to contain a $100 million piggy bank.

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