It turns out the business is a lot more lucrative than previously thought, at least for those agencies making car ads.

Advertising agencies never disclose precisely how large their profits are on specific accounts. But the world got a look at how much agencies make on an individual client when True North Communications, a Chicago advertising holding company, tallied up all the pain it will suffer after losing its biggest account, DaimlerChrysler AG's Chrysler Group unit.

True North's FCB agency has been the creative force behind Chrysler's Jeep and Chrysler ads but will lose the business over the next six months.

Chrysler is consolidating its $1.5-billion ad business and on Friday gave all of it to True North rival Omnicom Group, the agency that handles advertising for Chrysler's Dodge brand in the US.

So, True North told Wall Street how badly its profit would be hurt. In a conference call, Mr Kevin Smith, True North's chief financial officer, said the loss of the Chrysler account would wipe out 50 cents per diluted share, on an annualised basis. True North reported net income of 81 cents a share for 1999.

Adjusting the assumptions
Some analysts since have concluded that True North's profit margins on the car maker's account were about 20 per cent to 25 per cent. That is far more than the 12 per cent to 15 per cent profit margins many of them previously assumed True North had on the account.

"I was stunned," says Ms Lauren Rich Fine, an analyst at Merrill Lynch who revised her estimate on the profit margin to 30 per cent from 20 per cent following the conference call. "I knew they had big margins on this account, but I didn't think they'd be that high. If I were any other advertiser, I'd want to find out if the margins on my ad business were that big."

The size of the profit could spark other advertisers to begin grilling their agencies about the bottomline. "I can't help but wonder whether more accounts aren't going to sit down with their agencies and say, 'Hey, show me the math here,' " says Ms Fine. True North's next-biggest client is Compaq, whose campaign is expected to represent 5 per cent of the agency's annual revenue.

Compensation reviews
Margins rarely have been this out in the open before. In fact, many clients don't really know how profitable they are to the agencies they hire, though it is assumed that big clients bring significant profits, thanks to economies of scale.

Clients hold occasional "compensation reviews" with the agencies they hire, in which they attempt to get more for their money. In the old days, most companies paid agencies a flat 15 per cent commission on every dollar spent on TV time or for space in magazines or newspapers.

But some companies are demanding to know more. For instance, in 1999, Procter & Gamble, one of the biggest advertisers out there, joined a list of a few companies that wanted to pay their agencies based on the performance of the brands they pitched. That move, at least in theory, linked the campaign to sales growth.

As for Chrysler, "I was a little surprised that a large and sophisticated client would pay that much," says Ms Anthia Christian, an analyst at Credit Suisse First Boston. Her math suggests that Chrysler produced profit margins as high as 25 per cent to True North.

Mr Arthur "Bud" Liebler, senior vice-president in charge of marketing at Chrysler Group, says part of the reason True North was paid so much had to do with complexities related to Chrysler's ad budget.

There are two parts to the arrangement: The car maker, based in Auburn Hills, Mich., pays its agencies a flat fee for national ads. But associations representing car dealers across the country also pay the agencies a percentage of sales for local TV commercials and ads.

In other words, True North was getting additional revenue without having to do additional work. "It's just flowing to their bottom ine," says Mr Liebler. Despite the bonanza that the formula provides, Chrysler plans to keep it, though Mr Liebler contends it might not be the gold mine that it has been in the past.

Tougher market ahead
"The market [for new cars] is getting tougher," he says. "We've had three or four years of constant growth. That's projected to be flat in the coming year."

Meanwhile, investors drove up the value of True North shares on speculation that the holding company will become a take-over target. Industry analysts see potential bidders as including Omnicom, Interpublic Group of Cos., Cordiant Communications Group and Publicis Groupe.

"I'm sincerely sorry True North lost the [Chrysler] account because they have been doing a wonderful job with it consistently for many years," says Mr Maurice Levy, chief executive of Publicis Groupe.

However, Mr Levy notes that "this loss makes True North a very attractive target for a lot of holding companies." He said he hadn't spoken to Mr David Bell, True North's chief executive, for "many, many months" and declined to say if Publicis is pursuing the agency. Publicis holds a 10 per cent stake in True North.

Sarah Ellison in London contributed to this article.

The Wall Street Journal