Inside The Tug Of War For — And Within — Razorfish

While sources tell paidContent Publicis Groupe still appears to be winning the tug of war for Microsoft’s Razorfish, two WPP Group execs insist the UK ad holding company is still very much in the running. Microsoft (NSDQ: MSFT) did have a set of talks with WPP about buying Razorfish last summer, but sources say that the purpose was to gauge interest, as Microsoft wasn’t ready for a deal. WPP sources conceded that they were not aware if there had been any substantive talks since then.

But now, as the two-year anniversary of Microsoft’s closing of its $6 billion acquisition of Razorfish parent aQuantive approaches next month — and with it, the expiration of certain tax penalties on a Razorfish sale — the company looks like it’s gearing up for serious talks to unload the agency and WPP execs say the company is still open to talking about an acquisition.

A deal would come at a tough time for Razorfish, which has been hit by the pullback in ad spend that the industry in general is going through. Two sources with knowledge of the company’s financial state also told paidContent that they estimated that Razorfish’s revenues were down at least double digits this past year and that Microsoft has pressured the company to cut costs significantly. And that has led to roughly 200 layoffs — 12 percent of its 1,600 US staffers (it has another 800 staffers internationally) since last October — along with a reshuffling at the top.

Restructuring for a sale?: Aside from the layoffs and two office closings, Razorfish has had some notable changes at the top. In April, Clark Kokich handed the CEO reigns to Bob Lord, as the former moved into the new role of chairman. And there were other changes.. Razorfish has long been divided along three regions — east, west and central — and had separate P&L’s for each. Three Razorfish sources said that Kokich repeatedly defended the structure as saying it fostered innovation. But others felt the company had no real core, arguing that it was composed of a patchwork of shops. Microsoft might have grown concerned that potential buyers might have thought the same. As Redmond execs began taking a closer look at Razorfish, people familiar with the reorg suggest that part of Lord’s ascension called for demonstrating greater streamlining and unity. A clear example from that April reorg was the promotion of David Friedman as president of the Americas, the first time the agency had a single regional head. (Razorfish representatives directed all calls to Microsoft; a Microsoft rep said the company doesn’t comment on rumors.)

WPP plays up the *Google* angle: Razorfish has been fairly quiet in addressing the sale rumors with staffers for the past few months. A number of staffers say that clients are increasingly uncertain about what the company’s plans are and how it will affect them. Sources say that many Razorfish employees have taken to handicapping the two main companies vying for Razorfish, WPP and Publicis. Many accept that a further restructuring would be inevitable, since there would be so much much overlap at both firms. As one staffer told me, “Publicis has Digitas and the digital units under VivaKi, so I’m not sure where we would fit in that organization. At the same time, WPP’s digital holdings are pretty extensive, but it does appear that those shops operate a bit more independently.” For WPP’s part, despite doubts about its wherewithal to absorb such a large shop and meet Microsoft’s estimated $600 million asking price, the holding firm’s dealmakers may point out Publicis’ close relationship with Google (NSDQ: GOOG).

Two high-level WPP sources say CEO Sir Martin Sorrell — who has often described Google as a “frenemy,” despite the company’s own increased coziness with the search giant — expect him to highlight that by Razorfish in that orbit, Google would stand to benefit. Said one WPP source: “That’s not the whole argument, but it could be one more thing for Microsoft to consider regarding the sale.”