Oct 2001

As the third quarter of 2001 approached, the advertising business looked in poor shape internationally.

The dotcom bust and the tech downslide had combined to send revenues plummeting. Hopes for a come-back, at least in the short term, were scarce. Even advertising industry guru and head of WPP Sir Martin Sorrell put on a grim face saying that his top priority was to "get through" the advertising recession, which Sorrell said was "bath-shaped" and wouldn't begin to start climbing off the bottom until next summer.

But that was then and this is now. The shock of the terrorist attacks on New York and Washington September 11 has added to an economic downturn already underway. Media and advertising companies on both sides of the Atlantic are revising downward, again, their revenue and profit forecasts. US broadcasters were especially hard hit, but UBS Warburg bank summed up the problem when it declared that following September 11 European media stocks are now valued on the assumption that their earnings will fall 20 per cent in the next two years.

Pearson, the owner of the FT and the largest educational publisher in the world, has, like many media companies, been hit hard. Its stock price has fallen some 60 per cent since the beginning of the year. While only 10 per cent of the company's revenues are exposed to the cratering ad market, from a profits perspective advertising accounts for about 20 per cent of the bottom line profits.

When RTL Group, the broadcaster 22 per cent owned by Pearson, reported a 27 per cent fall in half-year profits, brokers like Morgan Stanley cut their earnings forecasts.

Didier Bellens, RTL Group's CEO, admitted that the environment has worsened for TV and radio advertising and went on to conclude that the company's predictions in July of a likely 10 to 15 per cent fall in full-year earnings from its 2000 level, are likely to be "greater than the level indicated."

Granada and Carlton are also feeling the pain. ITV advertising will fall an estimated 15 per cent this year and both UK broadcasters have seen their stocks fall to all-time lows. Carlton suffered the indignity of being kicked out of the FTSE 100 in late September. Global media giants meanwhile such as Disney, AOL Time Warner have already warned of missed targets. The one outstanding exception so far is Vivendi Universal , which generates only five per cent of revenues from advertising, is less cyclically exposed than AOL Time Warner.

In these trying times, companies are focused on managing the businesses they have, cutting costs where they can and, if they're big enough, looking out for bargains as smaller or less well-financed companies implode. But even this tried and true deal-making approach has its risks in this market.

When France's Havas Advertising made a pre-emptive bid for media buying company Tempus, rival WPP, which has a minority stake in Tempus, came in with a higher offer. The cynics thought WPP was more interested in bumping up the value of its stake rather than actually taking control of Tempus. But in the following weeks, the value of Tempus's business dropped as it felt the cold wind of the ad decline, Havas dropped its bid. Now WPP looks to be left holding the bag.

The ad downturn has been a gut punch to media companies, big and small. The only bright side is that maybe now the prices on media stocks have hit bottom, with re-vamped valuation models assuming only minimal cash flow growth for the next few years. This is a big shift for a sector that has long been considered over priced compared to its growth rates.