Sorrell Dismisses Share Drop, Celebrates Common Culture
NEW YORK--Investors greeted WPP Group's purchase of Young & Rubicam by driving down the British holding company's ADRs Friday, with shares dropping 5.5 percent to $60 by day's end. Since WPP began its on-again, off-again talks with Y&R early this year, the London concern's share price has slid some 40 percent. Some observers have raised eyebrows at Y&R management's agreement to strike a "no-collar" all-stock deal, whereby the agreed-upon value of the transaction won't be protected if WPP shares continue to drop during the time it takes to close the deal.
At Thursday's closing price for WPP ADRs of $63.50, the transaction was valued at $4.7 billion, representing a value of $53.02 for each Y&R share. WPP ADRs closed at $60 a share Friday, giving the transaction an indicated value of $50.10 a share. (Terms call for Y&R shareholders to receive either 0.835 new WPP ADRs or 4.175 new WPP ordinary shares.)
"Collars just invite more arbitrage; you get caught between the collar price and the real price. You make your best deal and take your chances," said Y&R CEO Tom Bell. "We're not concerned with the short-term price fluctuations in a deal that closes in three-to-four months time. Speculation in the press is causing this. Until now, we haven't been able to explain to investors how these companies will be more economically successful together than apart."
The drop in WPP's share price has made execs with compensation and options tied to company stock unhappy at other WPP's operating units, including J. Walter Thompson and Ogilvy & Mather, sources said.
Martin Sorrell, WPP's chief executive, said the drop in his company's share price is a "natural" initial reaction to the large issue of shares needed to complete the transaction. His "guess" is that there's been heavy arbitrage activity based on "rumors" in the press.
As expected, Bell--who becomes chairman of Y&R Inc.--said he will leave the company after helping to guide the transition in ownership. A company only needs one leader, said Bell. COO Mike Dolan takes over Bell's duties.
Ed Vick, after two years at the corporate level, returns to the ad side, replacing Graham Phillips, chairman and CEO, who is leaving. "He said he wouldn't let lightning strike twice," said a source about Phillips, who was a casualty during WPP's takeover of Ogilvy. Vick said his return is coincidental with the WPP deal. "I went to Tom weeks ago and said I wanted to come back." It is unclear what role worldwide creative director Ted Bell will play.
The industry's largest deal gives two-thirds of WPP ownership to current WPP shareholders and one-third to Y&R's. With combined 1999 revenue of $5.2 billion, WPP is laying claim to becoming the industry's largest communications company.
Y&R will continue as an independent operation, much like JWT and Ogilvy. The merging companies' global media operations--WPP's MindShare and Y&R's The Media Edge--will be maintained as separate units unless their top execs identify areas of common interest to the WPP/Y&R transition team.
As part of the deal, a group of Y&R senior executives pledged not to sell two-thirds of their Y&R shares and share equivalents for a year. Many signed employment contracts of two years and longer.
Sorrell has openly coveted Y&R for years.
His decision to strike now may stem from management changes in Y&R's executive suite. "[Peter] Georgescu left. Bell took over [in January], and he didn't have a lot of time to establish himself," says one informed observer.
Sorrell and Bell--who share clients like Ford, Sears, Mattel and Kraft--refused to comment on discussions with clients. They declined to discuss whether there are potential conflicts between WPP's Unilever business and that held by Y&R for Colgate. (Both Unilever and Colgate declined comment.) A major sticking point for Y&R in its white-night discussions with Publicis was $170 million of Ford business at risk because of Publicis' Renault account.
Sorrell underscored the companies' compatibility. "We share a common philosophy and culture, providing clients with integrated solutions to marketing needs," he said. "The two complement one another from a client, functional and geographic point of view." Sorrell said the combination will give WPP annual savings of $30 million. The deal will not have a dilutive effect on earnings in the first full year after the close.
Bell has downplayed reported bitterness with Sorrell during the negotiations.