OPINION: News Analysis - To buy, or not to buy, that is the question. WPP’s intended purchase of Young and Rubicam appears to have stalled but, according to those in the know, Martin Sorrell’s chase is far from over

Late last week Martin Sorrell’s WPP announced to the New York stock exchange that the long running, off and on deal with US advertising group Young and Rubicam was finally off. Definitely. Absolutely.

Late last week Martin Sorrell’s WPP announced to the New York stock

exchange that the long running, off and on deal with US advertising

group Young and Rubicam was finally off. Definitely. Absolutely.



The deal was within hours of being signed but Sorrell is said to have

been incensed by a clause inserted by Y&R CEO Tom Bell at the last

minute that would have given Y&R almost complete autonomy for a year and

would have given top Y&R executives the chance to take business with

them if they chose to leave.



Although the deal has nearly foundered before over terms for top Y&R

brass, the real problem is said to be a rumoured personality clash

between Sorrell and Bell. Nonetheless most observers agree that it will

probably still go ahead one way or another - simply because it means so

much to both sides.



Sorrell has been stalking Y&R for over a year now. WPP controls J Walter

Thompson and Ogilvy and Mather Worldwide groups and he needs a third

string to his bow if WPP is to compete with the likes of Interpublic and

Omnicom on the world stage. Given the Ford/Unilever underpinning of WPP,

and conventions on client conflicts, there are precious few alternative

buys.



Y&R meanwhile has been having a torrid time of it. Its share price

dipped to nearly half its January peak, the firm has lost major accounts

and staff are said to be despondent at the dismal prospects for their

share options if there is no deal.



The cruel facts of life for Y&R are that, despite being the fourth

largest agency in the US, it is too small to be viable on the world

stage. Yet, it has been talking to other suitors, notably Publicis.



A merger between Y&R and the French advertising group has been

announced, although Publicis was refusing to confirm this as PR Week

went to press.



But Publicis is a far smaller and less robust suitor than WPP, smaller

even than Y&R. To make matters worse, Y&R’s major client Ford, which

spends over pounds 1.25 billion a year on advertising, has publicly

threatened to withdraw its business if a deal is done with Publicis

which works for Renault and General Motors.



In a way the timing of the deal was unfortunate for WPP because the

excitement it generated almost completely overshadowed some very

impressive first quarter financial results. Revenues were up a hefty 20

per cent, operating margins are approaching the best in the industry and

the WPP share price has doubled in the past year. Martin Sorrell

professed to be particularly pleased that, of that 20 per cent revenue

growth, no less than two-thirds or 14 per cent was organic growth.



Impressive though that achievement is, it is nowhere near as impressive

as the growth that would result from the Y&R deal, should it go

through.



According to Advertising Age, WPP had income of pounds 3 billion in

1999. Y&R’s pounds 1.1 billion would boost WPP’s income growth by over

37 per cent. This would make it the biggest marketing services group in

the world and doubtless trigger a further round of acquisition by WPP’s

principal rivals Omnicom and Interpublic and the chasing rat pack of

smaller global marketing services groups.



Yet, of course, WPP’s recent performance and the mooted Y&R deal are

intimately linked. WPP initially became a global player in the

late-1980s through the audacious and acrimonious acquisition of Ogilvy

and Mather and J Walter Thompson. Those purchases saddled WPP a debt

which then nearly bankrupted it when the recession of the early-1990s

caused clients to slash marketing spends.



But Sorrell has learned his lesson and this time acquisition is not

being funded by borrowing, but by WPP shares and cash surpluses - which

are dependent for their value upon recent trading performance.



Any new deal would give WPP three worldwide PR networks: Y&R’s

Burson-Marsteller, Hill and Knowlton and Ogilvy PR; as well as a raft of

other specialist shops such as WPP’s Buchanan Communications and

healthcare company Shire Hall Group, alongside Y&R’s Cohn and Wolfe and

the Banner Corporation. It would make WPP the biggest single force in

the PR world.



WPP sources say that larger PR brands increase the ability to spread

best practice and offer clients the global reach of big networks.

However, some have reservations about the relevance of size in the PR

industry.



’Size per se often brings more problems than solutions,’ says Adrian

Wheeler, CEO of GCI APCO. ’Co-ordination of offices is a major problem,’

he argues.



But he does agree that size is increasingly important to clients. ’On an

emotional level it makes them feel safe.’



WPP is unlikely to have spent a fortune on brand names like

Burson-Marsteller simply to fold them into the likes of Hill and

Knowlton. But the question remains as to why it needs three global PR

networks on top of a host of specialists.



The role of the specialists is easy - market segmentation. As for the

networks, Wheeler suggests that Sorrell has his eye on the long

term.



’Globalisation of business means that in most industries, it is

predicted that there will only be five or so mega players left within

ten years or so.’



If the marketing services industry is consolidating in this way, WPP has

the choice of either acquiring other players or eventually being

acquired itself. There is no doubt that Martin Sorrell does not see his

future as a divisional operating officer in somebody else’s global

empire. So despite his sensitivity on the subject, acquisition will

continue to be the name of his game and, should it finally go through,

Young and Rubicam will be merely the first of several giant targets WPP

consumes in the coming years.



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