Y&R Wpp: Is This Deal Really Dead?

Merger plans for Y&R and WPP are off again--but stay tuned

Are U.S.-based Young & Rubicam and Britain's WPP Group better at soap operas than advertising? You have to wonder after merger talks between the two ad giants fell out of bed on Apr. 28 for the second time in four months. Insiders say the animosity, intrigue, and accusations of dirty dealing on both sides have true prime-time potential. And on May 1, the world turned again when Y&R announced it was in preliminary merger talks with French advertising group Publicis. That leaves Martin Sorrell, WPP's 55-year-old chairman, in the cold--at least until the next episode.

That may not be far off. Sorrell, after all, earned a reputation as a shrewd, hard-nosed dealmaker in the late 1980s, when he orchestrated back-to-back hostile takeovers of Ogilvy & Mather Worldwide Inc. and J. Walter Thompson. While Sorrell downplays the prospect of a similarly unwelcome bid for Y&R, it's clear he still covets the company.

And though there's no denying Sorrell's huge ambitions, the London adman has a world view that's worth taking seriously. Sorrell believes the global consolidation of the agency business--which he kicked off in the 1980s--is still gathering steam. When it's over, he thinks the ad industry will be just as concentrated as cars or computer hardware.

The victors in this Darwinian struggle, the WPP chief says, will be global companies which are rooted in the world's strongest and most vibrant commercial market, the U.S. American companies account for half of the trillion dollars spent globally on marketing, and American practices in the advertising discipline will eventually become the global standard. And America is the focal point of WPP's new forays into Internet advertising.

So WPP, strong as it is in the U.S., wants to be stronger. A merger with Young & Rubicam would create the world's largest advertising group, with estimated sales of $17 billion, billings of more than $50 billion, and a blue-chip client roster on two continents. The two companies could also consolidate strengths in sharing clients such as Ford, Sears, Kraft, and Mattell. "There is inexorable strategic logic behind putting these two companies together," Sorrell says.

Expect Sorrell, then, to keep up the pressure--though there's no one to say he won't pursue other agencies. Even now, Y&R executives concede a deal with WPP makes for an easier fit than one with Publicis. WPP and Y&R are essentially holding companies. Both agencies are known for excellent brand research. Both have top-tier public relations and media buying divisions. Together, their ability to negotiate sweetheart deals buying airtime for ads would be unrivaled. Says a senior exec at a competing global agency: "These guys talk the same language."

Publicis, by contrast, seems uncomfortable as a white knight. "The deal with Publicis looks like an act of frustration," says the head of a rival agency. Many outsiders say the French giant is wrong for the role. Its clients include BMW and General Motors Corp.'s Saturn, which puts Publicis in competition with Y&R's biggest account, Ford Motor Co. Y&R execs say privately that they've cleared a Publicis deal with Ford. But then there's Publicis' earlier foray into the U.S., a venture with Foote, Cone & Belding: It was a disaster. In addition, Publicis is 40% family owned, and it's unclear whether it can afford a deal. "We're not anywhere near knowing whether this makes sense for us," a Publicis spokeman said in Paris on May 2.

Which leads to the obvious question: Why doesn't Y&R cave in, after getting the best deal for shareholders? Well, advertising is still a business where the personal touch matters. And many in the industry think Sorrell's touch leaves much to be desired. "He's very interfering," says one rival ad chief.

Y&R execs seem to agree. Sorrell's reputation for tough takeovers and ruthless management has led the Y&R negotiators to make numerous requests for golden parachutes and other protective arrangements. Y&R claims Sorrell effectively called off the $5.5 billion deal over an estimated aftertax cost of $60 million in employment agreements--peanuts in a deal of this size.

Sorrell says otherwise. Although he concedes that he thinks the $60 million "could be used in more effective ways," he asserts that he opposed the parachutes out of concern for the divisive mood they would create. One of Sorrell's main objections was Y&R'S demand to operate independently for a year after the merger. When he acquired Ogilvy and J. Walter Thompson, Sorrell adds, no such agreements were needed. And as Sorrell rightly points out, he has coaxed some excellent earnings out of J. Walter Thompson and Ogilvy & Mather. Combined revenue growth for the last five years has averaged 8% annually, and operating margins have hovered near 15%.

Sorrell even has his supporters: "Martin is very buttoned-up but does a very good job," says Jay Chiat, co-founder of Chiat/Day Advertising, now part of Omnicom. "I'm a big fan." And for all the sympathy extended to Y&R, some think the firm could do with a boost of new talent. "Y&R is known as one of the stodgier names," says a creative chief at a rival shop. "They have some big accounts, but they're not very innovative."

A Publicis bid may benefit Sorrell more than anyone. When the talks broke off, he agreed not to make any public offers for Y&R until November--or until a new bidder for Y&R emerges. If Publicis were to bid, Sorrell could make his case directly to Y&R shareholders--who might be more receptive than management. The day after Y&R announced its talks with Publicis, Y&R's shares fell 10% in New York, to $50.

For now, the bad blood between WPP and Y&R makes any immediate rapprochement unlikely. But if the stock price is any guide, Y&R shareholders and clients are likely to push for a happy ending to Y&R's drama with WPP. And it's a safe bet Sorrell has a fine idea for a final scene.

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