On top of that, two big investment banks, UBS Warburg and Merrill Lynch, recently said ad industry growth has peaked for now. Yahoo! Inc., which operates Internet portals, and Clear Channel Communications Inc., which sells advertising on billboards and radio stations, recently announced that ad revenues would be weaker than expected this year. It turns out that the ad business is cyclical, after all.

After a flurry of acquisitions in recent years, such companies as Omnicom Group Inc., Interpublic Group of Cos., Havas Advertising SA and WPP Group PLC now derive more than half their revenues from non-traditional advertising businesses, such as public relations, event management and sales promotion. The rationale was that diversified ad firms are more stable than traditional ad business, and make for a better investment.

But investors are losing faith in that story. Even diversified ad firms will suffer when corporate profits are squeezed and marketing budgets are cut, investors reason.

"American agencies are going to be hit by dollar strength and a weak euro, so big American exporters will find it hard to export to Europe," says Ms Lorna Tilbian, analyst at WestLB Panmure in London. "It doesn't make for a buoyant earnings outlook for ad groups on either side of the Atlantic."Some analysts are more positive for the remainder of the year and say that big listed ad companies are benefiting not necessarily from growth in overall ad expenditure, but from large companies consolidating their ad accounts with global agencies. The major agencies, therefore, gain business even as companies cut back on overall expenditure. The losers are the small ad shops that are cut out as consolidation and cost-cutting become more important to clients. "If you are small, you're doomed," says Mr Thomas Deitz, ad analyst at Merrill Lynch in London.

Some ad agencies are more susceptible than others, at least in the short term, analysts say. Publicis Chief Executive Mr Maurice Levy told reporters in New York last week that the French group, with the majority of its business in Europe, would be relatively unaffected by the weak euro and a potential slowdown in the US economy.

Overall, European ad companies have a temporary advantage, if only because they report numbers in weak euros, not strong dollars or pounds. The dollars or pounds they earn overseas translate into more euros than they did a year ago. Furthermore, some analysts say that European advertising markets still stand to benefit from spending by dotcom companies. "Internet start-ups didn't arrive in Europe until late last year, so the slowdown in Internet spending will be pushed back as well," says Mr Fergus O'Sullivan, analyst with Schroder Salomon Smith Barney in London.

Havas Advertising, which is due on Monday to report its earnings for the first half of the year, seems to have made all the right moves in terms of investing in marketing services, says Mr O'Sullivan, who estimates that Havas gets 75 per cent of its revenue from those businesses.

Havas, whose purchase of Snyder Communications of the US is expected to be completed on Monday, is forecast to announce a 21 per cent rise in pre-tax profit to 85.3 million euros ($74.9 million) from 70.6 million euros ($62 million) a year earlier, according to Merrill Lynch.

Separately, the London office of Havas Advertising's Euro RSCG unit has wrested Alberto Culver's $40 million (45.4 million euros) international ad account for the hair-care brand VO5 from M&C Saatchi. The move follows last month's appointment of Euro RSCG's Chicago office to handle US and Canadian advertising for the VO5 brand.

The switch is part of a new globalisation strategy, according to an Alberto Culver spokesman. Media buying duties, handled by Carat, unit of Aegis Group PLC, aren't affected, the spokesman said.

The Wall Street Journal