Why Interpublic Owes Its Clients $88M in One Word: Facebook

Last Updated Aug 15, 2011 2:45 PM EDT

Bravo to Interpublic (IPG) CEO Michael Roth, who turned a $5 million 2006 investment in Facebook into a $133 million profit, according to a statement by the ad agency network this morning. There's just one downside: Now Roth owes his clients about $88 million of that money, considering that he used their cash to get that stake in the first place.

IPG, which owns agencies such as McCann Erickson and DraftFCB, bought a 0.4 percent stake in Facebook five years ago for just $5 million. The terms of the deal required IPG to buy $10 million in advertising on the social network -- a potential client conflict given that IPG had a vested interest in fulfilling its $10 million promise regardless of its clients' needs. (Of course, there are plenty of clients willing to advertise on Facebook, so there were probably few complaints.) IPG sold half that stake today, giving Facebook an implied "value" of $66.5 billion.

But hold on a moment. The only reason IPG owned the stake is because it promised to give Facebook $10 million of its clients' cash. The agency holding company only used $5 million of its own money. Doesn't IPG therefore owe its clients who advertised on Facebook between 2006 and now two-thirds of its $133 million windfall? Not legally, perhaps, but ethically.

Clients might also want to note that IPG retained the other half of its stake -- 0.2 percent. Whenever an IPG executive suggests to a client that they run a campaign on Facebook, perhaps the best client response should be, What's in this for me?

Two further housekeeping points:

  1. By keeping the 0.2 percent stake, IPG probably guarantees it retains a seat on Facebook's cliquey "client council", which advises vp/global ad sales Carolyn Everson (pictured) on how to make the social network a more inviting place for advertisers. Even if IPG's remaining stake was worth nothing, it's still made its money back 27 times over, so retaining part of the stake will help insure that Facebook will find it difficult to refuse IPG when it asks for access to its ad sales executives.
  2. This is the third event suggesting that the insider "smart" money is trying to cash out its Facebook investments before the 2012 IPO. The first was in February, when employees were given the opportunity to sell their stakes. The second was in April when investors tried to offload $1 billion of their privately held equity.
With the market crash driving down valuations of tech stocks that are dependent on advertising, might IPG et al. know something the rest of us don't?

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Image by Flickr user Max B, CC.