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International: $ 1.31-bn Grey acquisition likely to make WPP industry topper

14-September-2004
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International: $ 1.31-bn Grey acquisition likely to make WPP industry topper

With the Sunday’s buyout of Grey Global, WPP is likely to emerge as the largest advertising firm in the world. According to agency reports, after the $ 1.31-billion cash-and-stock buyout, the combined revenues of WPP and Grey for 2003 would be $ 8.637 billion – exceeding the industry leader Omnicom’s $ 8.621 billion.

Currently, WPP – the second spot holder, is followed by New York-based Interpublic Group with 2003 revenues of $ 5.86 billion, while Publicis of France is at the fourth place with $ 4.71 billion revenue records.

As reported on Monday, the UK-based WPP group, led by ad baron Martin Sorrell, raised its initial offer outbidding the French contender Havas and a joint bid from venture capital duo Hellman & Friedman and Kohlberg Kravis Roberts.

The big-budget takeover has thrown up some interesting issues that the industry across the world is looking at. Grey has a long-standing advertising partnership with the FMCG major Procter & Gamble – the world’s biggest ad spender. WPP, on the other hand, is associated with the rival consumer goods leviathan Unilever. In order to maintain a balance between the conflicting accounts, WPP has declared the plan to run Grey’s business as a separate and independent unit with Ed Meyer, the existing Grey chairman, president and chief executive, continuing with the new division.

Among other issues seeking consolidation, the buyout throws up the immediate need for WPP to reconcile the profit margin of Grey, which was way below the industry average. As per reports, WPP is eyeing at an operating margin of 14 per cent in 2005 and 14.5 per cent in 2006 for the combined entity. Grey’s 2003 operating margins of 5.8 per cent was far below WPP’s 13 per cent. With all these issues coming up, the future holds interesting developments for the advertising community.

Coming to media front, WPP is planning to work out strategies for Mediacom, Grey’s media planning and buying wing, to explore opportunities leveraging the media buying scale of Group M – WPP’s media investment and management outfit.

Bourses, however, responded positively to the deal with Grey shares opening at $ 1,005 on Monday against the Friday closing of $ 940 per share. Considering the raised share prices and a net cash corpus of $ 172 million, the deal for buying out Grey – the world’s seventh largest advertising group, is pegged at $ 1.31 billion. WPP, however, dipped from its earlier highs at bourses with brokers greeting the acquisition with a note of caution, considering the investment and its effect on 2004 earnings. But, on a whole, media stocks were in demand.

The deal is the latest in a string of large-volume acquisition moves, undertaken by WPP chief Sorrell. In 1987, the company bought out JWT Group and acquired Ogilvy & Mather Worldwide in two years. Biggies like Young & Rubicam and Cordiant Communications followed the track. Analysts are now anticipating French ad agency Havas to be Sorrell’s next prey.

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