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
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
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
’Size per se often brings more problems than solutions,’ says Adrian
Wheeler, CEO of GCI APCO. ’Co-ordination of offices is a major problem,’
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
’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.