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CITIC, WPP: Behind the Split

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NEW YORK When CITIC Guoan recently announced the termination of its joint venture with Grey Worldwide, the split was curious to say the least: In making the statement to reporters in Beijing, the Chinese company's executive vice chairman Yan Gang blamed the parting on Grey parent WPP and its CEO Martin Sorrell, whom he claimed behaved "very rudely" toward his Chinese counterparts.

The public rebuke is all the more remarkable because it pits Yan, one of China's most prominent admen, against Sorrell, one of China's most vocal Western supporters. Like all breakups, the story behind it, with its alleged misdeeds, is far more complicated than it would seem. Moreover, like many acrimonious uncouplings, the central issue is money—or in the case of this alliance, the lack thereof.

Despite its prominent participants, after 14 years, the joint venture was only ringing up $6 million in revenue and was unprofitable, said sources close to the partnership.

WPP declined to comment on the split, but said the alliance generated just 1 percent of the holding company's $500 million in revenue from the country.

Speaking through an interpreter last week, Yan contended the venture might have been more profitable had Grey not been involved in "ways to transfer would-be profits out of the country."

Sorrell declined to respond, but it's understood that WPP believes Yan's allegations are without foundation and are reflective of his frustration with the unprofitability of the joint venture, which was due to expire next year.

It is believed that Ernst & Young conducted an audit, but a company rep said the firm is prohibited from speaking about its clients.

Grey Global CEO Ed Meyer didn't respond to interview requests, but a company rep said: "Both sides' auditors have looked at this situation and found that we have operated in accordance with accepted accounting principals and standard business practices."

Yan responded: "[I] didn't think much of the audit. It was just a list of numbers. When [I] asked an Ernst & Young representative, they couldn't answer any of our questions."

Events leading up to the confrontation between Yan and Sorrell at WPP's headquarters in April began earlier this year after CITIC's auditors looked into the joint venture's financial results of the past five years, Yan said.

Yan said he first contacted Grey's Meyer about the situation, who referred him to WPP. In March, the Chinese executive said he sent Sorrell correspondence congratulating him on the Grey acquisition, and voiced hope the joint venture would improve its results. In what some sources contend was a threatening tone, Yan then raised his recently discovered concerns: "[I wrote] we found problems with Grey China and we'd like to meet with Sir Martin to find the proper resolution of the issues, and we also said if those issues were not resolved or handled properly, it may impede WPP's progress in China. Such an e-mail sent to Sir Martin was not a threat."

Sorrell suggested Yan, a well-connected executive who is the director of the China Advertising Association as well as a member of the Beijing 2008 Olympics Committee, come to WPP's London headquarters to discuss the matter. Yan described the April meeting this way: "When we presented [our] auditor's report in London, Sir Martin Sorrell refused to talk about it. He got up to shake [my] hand to end the meeting and we were forced to stand up and talk about what we came to discuss. Sir Martin asked us to take the words back. We have told media people that it was rude, uncultured manners from Sir Martin Sorrell. We don't know exactly why he treated us in that manner."

In response to Sorrell, Yan said he tore up a printout of his WPP e-mail, which he brought to the meeting. WPP had no comment on the meeting, but it's understood that it takes exception with this version of events. Sources said that in advance of the renewal of the joint venture, Yan asked for additional money for CITIC, which WPP did not believe it owed.

Because most of the Chinese joint-venture clients were multinationals like Procter & Gamble, marketers' payments were made to Grey's New York headquarters. Grey's standard practice is to allocate revenue and costs back to each country working on such accounts, and it's understood that Grey believes Yan is taking issue with the percentage coming back to the Chinese venture.

According to Yan: "We did not go to London to ask for money, simply to say to Martin Sorrell, as CEO of WPP, to return the money."

On June 19, a meeting is scheduled to finalize Grey's buyout of its Chinese partner's stake, believed to be 30 percent, sources said.

Shortly after that session at WPP, CITIC lost little time in reaching out to Omnicom. At a meeting in April at China's Grand Epoch City conference and exhibition center, owned by CITIC, Yan and the company's chairman, Li Shulin, met with Omnicom CEO John Wren, Michael Birkin, Omnicom CEO, Asia Pacific, and Serge Dumont, Omnicom president, Asia Pacific. A deal was quickly struck.