UPDATE 2-Dentsu slashes outlook, to buy U.S. ad agency
*Q2 profit drops on weaker advertising spending
*Cuts full-year outlook, expecting slowdown to continue
*To acquire U.S. advertising firm McGarry Bowen
*Dentsu shares close up 6.7 pct ahead of announcement (Adds company comments, background)
TOKYO, Nov 12 (Reuters) - Dentsu Inc (4324.T), Japan's largest advertising company, cut its annual profit outlook by 20 percent and said it would buy a U.S. ad agency as it seeks growth outside the stagnant and mature domestic market.
Dentsu's slump reflects the pain being felt across the corporate sector. Its clients are cutting their advertising budgets as high raw materials prices, a stronger yen and a faltering economy eat into their profits.
Dentsu said it would buy McGarry Bowen, the 38th largest advertising agency in the United States, for an undisclosed amount as it aims to beef up its presence outside Japan, which it still counts on for more than 90 percent of its sales.
But the move will do little to close the gap with larger rivals Omnicom Group (OMC.N) and WPP Group (WPP.L) in terms of global reach and comes as Dentsu faces a market slump that could stretch well into next year.
Macquarie Securities analyst George Hogan said Dentsu's forecast for parent billings to decline 3.5 percent in the October-March second half could prove optimisitic, as it would mark an improvement following a fall of 6.4 percent in the first half.
"The general feeling is that actually the economy has started to dip down and things are getting worse not better," said Hogan, adding that the Japanese TV and advertising market could decline well into the first half of next financial year.
Dentsu, which ranks fifth in the global advertising market, cut its operating profit forecast for the full year to March to 45.3 billion yen ($463.1 million), short of the consensus of 51.2 billion yen in a poll of 13 analysts by Reuters Estimates.
It lowered its annual sales forecast to 1.95 trillion yen from 2.06 trillion yen, as growing economic uncertainty prompts companies to roll back advertising spending through television, newspapers, radio and magazines.
For the July-September quarter, Dentsu said its operating profit came to 13.1 billion yen ($134 million), down about 18 percent from 15.9 billion yen a year earlier, despite a boost from the 2008 Beijing Olympic games.
Asatsu-DK (9747.T), Japan's third-largest advertising company, also lowered its outlook on Tuesday, predicting operating profit would fall by nearly two-thirds to 2.7 billion yen in calendar 2008. [ID:nT12AD3TB]
"Japan's economic situation is really severe. Consumer spending is weak and financial market turmoil is casting a pall over the real economy," Dentsu's Managing Director and Chief Financial Officer Setsuo Kamai told a news conference.
Dentsu, whose global competitors also include Interpublic Group (IPG.N) and Publicis (PUBP.PA), said acquiring McGarry Bowen would bring it clients and talented staff. The company has 235 employees and revenue of about $57 million.
"At best I think it's a toehold. It's not a foothold. It doesn't at all put them in a position to compete on equal grounds with guys like Omnicom and WPP," Macquarie's Hogan said.
Dentsu's shares, owned 16 percent by foreign investors, have lost about one-third of their value since the start of this year.
The stock closed Wednesday up 6.7 percent at 165,700 yen prior to the announcement on a report in the Wall Street Journal on the McGarry Bowen acquisition. That outperformed a 1.3 percent decline in the benchmark Nikkei average .N225 ($1=97.80 Yen) (Reporting by Mariko Katsumura; Editing by Michael Watson)