Sir Martin's Shopping Spree

WPP Group is adding Grey Global. Can he keep growing by conquest?

Sir Martin S. Sorrell, CEO of British communications giant WPP Group PLC (WPPGY ), is characteristically understated about the latest $1.5 billion goody he has tossed into his shopping basket. "I wouldn't describe it as a must-have," says Sorrell of acquiring Grey Global Group Inc. (GREY ) on Sept. 12. "I would describe it as a very-nice-to-have." After all, there was hardly heated competition for the New York advertising company, which has been struggling to boost margins in a fast-consolidating industry. WPP's top three rivals didn't even make a bid, and smaller competitor Havas (HAVS ) offered substantially less. But with Grey, WPP would have a combined revenue of about $8.6 billion last year -- essentially matching Omnicom Group Inc. (OMC ) as the industry's largest player. More important, it gives him a chance to quickly ratchet up profits by merging the back office and cutting the workforce.


Few know more about the forces squeezing advertisers right now than the man who 19 years ago bought a shell company called Wire & Plastic Products and, with nonstop acquisitions, turned it into a global communications force with two of the most storied ad agency names in the world: J. Walter Thompson and Ogilvy & Mather. Sorrell has built healthy 14% margins through reducing his reliance on traditional advertising -- where the cost of network television has outstripped inflation even as audience numbers have fallen -- and by cementing his leading position in the higher-growth Asia-Pacific markets. He has also been aggressive in snapping up the few big fish that are still swimming solo -- not to mention their marquee clients such as Grey mainstay Procter & Gamble Co. (PG ). This allows Sorrell to shrink fixed costs and provide a full array of services to clients.

The CEO, who calls himself the "poor man's Warren Buffett" because he writes essays in his annual reports, has plenty of challenges as he digests his latest acquisition. One is simply integrating Grey, a company of 10,500 employees, into a family that already includes Ogilvy, Thompson, Young & Rubicam, Cordiant, and numerous other players.

There have been hiccups in WPP's past. After buying Y&R four years ago for $4.7 billion, WPP saw a management and client exodus after. That integration is now going "quite" well, says Sorrell, though he stresses that he means "quite" in the more modest English sense of the word. Now there are industry rumors of more client defections after the latest deal. While Sorrell brushes those aside, getting archrivals such as P&G and Unilever, and Mattel (MAT ) and Hasbro (HAS ), to co-exist under one roof might not be easy. And if they do stay, such clients will undoubtedly hammer hard to lower the fees they pay.

Certainly, Grey CEO Edward H. Meyer was feeling the pressure. After 34 years in the top job, Meyer felt the advantages of joining a bigger outfit were too strong to resist. He'll continue to run Grey through the end of 2006. Although the 77-year-old Meyer jokes that he had to convince Sorrell, 59, that he wasn't after his job, he is eager to join WPP's board. Says Meyer: "I want to see how he did it and how he does it."

He's not alone. Sorrell has hardly any big acquisition targets left to pluck for his portfolio, and a lot of people are wondering about his next act. Analyst Michael B. Nathanson of Sanford C. Bernstein & Co. points out that holding companies have already snapped up more than half of the big 15 independent agencies of the early 1990s. He argues that WPP should channel more of its abundant cash -- it generated $800 million last year, despite the ad recession -- into investors' pockets. "A lot of people wish they would buy back shares or increase dividends," he notes. Sorrell recently boosted dividends by 20%, but splitting the pot hardly seems to be his top priority at the moment.

Sorrell has other things on his mind. He wants to expand in Asia-Pacific, arguing that "the West underestimates the potential power of the East and the shift of wealth that is taking place already." He'll need his war chest to acquire agencies in developing markets. And he is nervous about the ad business in the the all-important U.S. market, where, Sorrell says, the heavy government outlays and the mounting federal budget deficit mean that "whoever is elected will probably have to deal with a weak dollar and growing inflation." Meanwhile, he compares Western Europe -- a shrinking part of his pie -- to a mature company saddled with hefty health-care and pension costs, while resisting the immigration that could actually spark growth.

Traditional advertising, with its reliance on 30-second television spots, is also fading on Sorrell's radar screen. The rising cost of network TV, as well as the fragmentation of mass media, has clients eager for alternatives. Among the hot areas: cable, satellite, outdoor ads, guerrilla marketing, online advertising, and radio. Sorrell continues to beef up those parts of the business, so as not to lose clients to smaller, nimbler rivals.

Grey brings a similar mix of businesses. It also brings another chance for Martin Sorrell to strut his stuff. Look for the master of cost-cutting to bring new technology to Grey, gaining efficiencies in everything from telephone contracts to employee benefits. He even welcomes the chance to work with the "equally obsessive" Meyer. "I call him Mr. Meyer, and he calls me Sir Martin," he laughs. It's a title that Sorrell no doubt feels he has earned. As he puts it: "We haven't done badly for a little wire basket manufacturer." Another understatement, perhaps, but Sorrell knows the value of a subtle pitch.

By Diane Brady in New York

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