WPP-Grey Merger Won't Affect DM Division

DM shop Grey Direct won't be affected once WPP Group PLC completes its acquisition of Grey Global Group Inc., an official said yesterday. WPP will pay $1.31 billion equally in cash and stock for the world's last major independent advertising agency conglomerate.

Grey Global will become an independent unit of WPP, alongside agency brands like Ogilvy & Mather, J. Walter Thompson Co. and Young & Rubicam. It brings clients such as Procter & Gamble Co., 3M, Adobe, JP Morgan Chase, ConAgra, Hasbro, Mars, Warner Bros. and Boehringer Ingelheim.

“The news about Grey Global Group and WPP is great for our clients and employees,” said Larry Kimmel, chairman/CEO of Grey Direct. “Grey will operate as an independent network within the WPP family, under the Grey name. Yet, now Grey will be able to draw upon even more resources to service our clients' needs.”

The Grey Direct division handles clients like GlaxoSmithKline, Xerox Corp., United Airlines, Oracle Corp., Adobe, BellSouth and Cendant.

Besides a larger geographical footprint and a stronger presence in the fast-growing Latin American and Asian markets, another reason for the Grey purchase is WPP's aim to further diversify into marketing services as distinct from brand advertising.

The enlarged WPP-Grey entity receives 49 percent of its revenue from brand advertising and media management. The rest is from marketing services, which include public relations, sales promotion, corporate identity and design, direct, interactive, information insight and consulting along with the Internet.

“There's a push to increase the marketing services cake either through acquisition or organic growth,” said Richard Oldworth, CEO of WPP-owned public relations agency Buchanan Communications, London. “They want to get marketing services to two-thirds of the entire group. They also want to increase their quantitative business — direct, interactive, Internet and information insight and consultancy. Today, if you combine Grey and WPP in that category, it's 32 percent of group revenues.”

WPP beat France's Havas Advertising and San Francisco-based private equity firm Hellman & Friedman to acquire Grey, which started out as a direct mail shop 87 years ago.

“In addition to broadening our relationship with a number of our leading clients, Grey will bring access to new clients, strengthen our activities in advertising, media investment management, public relations, healthcare and direct and interactive,” WPP CEO Martin Sorrell said in a statement.

The defeat was particularly harsh for WPP's cross-channel rival Havas. The French company owns agency brands like Euro RSCG Worldwide, New York; Media Planning Group, Barcelona, Spain; and Arnold Worldwide Partners, Boston. In a statement from Paris, Havas chairman/CEO Alain de Pouzilhac explained his company's decision not to better WPP's offer for Grey.

“At the end of the offer process, we concluded that the price required by Grey would not allow us to generate sufficient added value for our shareholders,” de Pouzilhac said. “As a result, we did not increase our offer, so as to remain totally focused on the objectives I set [for] our teams over a year ago: to relaunch our group to rapidly reach the same growth and operating margin levels as the market leaders. This is our goal.”

Merrill Lynch International and Morgan Stanley advised WPP on the Grey purchase. The transaction does not require WPP shareholder approval and will close by the end of the year after customary closing conditions, including regulatory approval.

Under terms of the deal, Grey chairman/CEO Ed Meyer, holder of a 20.5 percent stake and 43.5 percent of the voting shares, will keep that title until December 2006. He has worked at the publicly traded Grey for nearly 50 years — his entire career — and headed the firm since 1970. He will report to Sorrell after the acquisition.

Based in London, WPP employs 72,000 people in 1,700 offices across 104 countries. Its client list includes 300 companies on the Fortune 500 list, including IBM Corp., Ford Motor Co., American Express Co. and Unilever. Revenue last year was an estimated $6.4 billion.

WPP will make efforts to avoid conflicts over packaged goods rivals Unilever and P&G advertising, both now under its roof. But overall, there are few other clashes to antagonize clients.

WPP has identified cost savings of $20 million from the Grey purchase. It also claims room for margin improvement in staff productivity and combining property and IT infrastructure as well as economies of scale in combined purchasing arrangements.

Operating margins is another area for improvement at Grey. Last year's operating margin for Grey was 5.8 percent versus 13 percent for WPP. The targets for next year are 10.5 percent for Grey and 14.5 percent for WPP, with a combined 14 percent.

Last year, Grey reported worldwide revenue of more than $1.3 billion. The group has nearly 10,500 employees in 90 countries. Besides Grey Direct, other units include Grey Worldwide, Grey Interactive, Grey Healthcare and MediaCom Worldwide, the media planning and buying arm that will tap WPP's Group M for buying scale.

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