Publicis Writes Down Digital Agency Group By Roughly $1.5 Billion

mauricePublicis will write down its digital arm, Publicis.Sapient, by roughly $1.5 billion – almost half of its initial valuation – the company told investors during its earnings call Thursday.

Sapient, for which Publicis paid $3.7 billion in 2014 to expand its digital assets, has become a drag on the overall business.

While Sapient grew 7% in 2016, its growth has not met expectations, culminating in a slowdown of the holding company’s organic growth. Publicis posted -2.5% growth for Q4 and 0.7% for the full year. North America was the weakest region, with a staggering -6.9% growth rate for the year.

After the announcement, shares of the company fell 5% in Paris trading.

“Publicis.Sapient concentrates almost 50% of the goodwill that we have in our books due to the significant acquisitions we made in the field,” said Chief Financial Officer Jean-Michael Etienne. “The tests that we conducted when we closed the 2016 books revealed that we had to impair the books on Publicis.Sapient.”

Etienne and CEO Maurice Lévy attributed slow growth to issues at Razorfish, including the high turnover of CEOs and duplicative offerings between itself and SapientNitro. Razorfish fell by 15% year on year.

“Some triggering events were obvious, such as the specific situation of Razorfish as well as the slowness in the Sapient integration,” Etienne said.

Publicis merged SapientNitro and Razorfish in November in the hopes of streamlining redundant assets.

For Publicis, the struggle to integrate Sapient is a blow to the company’s overall digital strategy.

At the time of acquisition, Lévy referred to the digital consulting agency as the holding company’s “crown jewel” which would enhance its leadership position in digital, achieve its goal of deriving 50% of revenues from digital by 2018 and leverage technology and consulting capabilities to expand in new verticals.

Publicis also continues to be stung by major account losses during the pitchapalooza of 2015 and early 2016, including Procter & Gamble and Walmart.

“We have been hurt big-time in Q4, more than we expected,” Lévy told investors. “We not only had the impact of account losses in 2015 and early 2016, but on top we had very little one-offs and many urgent cuts.”

And an ongoing reorganization of its agency assets under three distinct umbrellas continues to cause confusion throughout the group.

“2016 was a very busy year,” Lévy said. “We have decided to dramatically change our organization. It was a little bit like changing the tire of a car while driving.”

Despite these setbacks, Lévy, who will depart Publicis in June, says his legacy will remain strong. The group has bounced back this year with a couple of account wins, including MillerCoors and Mattel.

And without the negative impacts of Razorfish, growth would have remained flat in 2016, providing “a different picture on the underlying health of the overall business,” wrote Pivotal analyst Brian Wieser in a note to investors.

“An eventual turnaround at that unit should help support margin improvements, as should the company’s ongoing efforts to rationalize operations in smaller markets via the company’s Publicis One model,” he wrote. “The combination of Publicis’ media agencies into a single division should also help. Paired with the appointment of the company’s new CEO, the company looks set up to produce momentum as the year progresses.”

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