Close-Up: Live Issue - Risky business as Meyer holds out for a good deal, Friday, 16 July 2004 12:00AM

It's unclear why the head of Grey has opted for a public auction, Bob Willott writes The "for sale" sign hanging over Grey Global Group prompts more questions than answers about the motives of the chief executive, Ed Meyer.

Assuming there is just a handful of potential buyers from within the industry, surely Meyer must have had private conversations with them in the past? Must we therefore conclude that no offers were forthcoming, or that he did not like the terms or the number of noughts on the end?

Indeed, earlier this week, Maurice Levy ruled Publicis Groupe out of the bidding in an interview with Le Figaro.

Does Meyer think there may be more generous buyers outside the marketing industry network, perhaps from the entertainment or technology sectors?

Have the investment bankers Goldman Sachs and JP Morgan Chase seduced him into believing they can do better by arranging a public auction than by conventional private negotiations? If so, are the only certain winners the bankers who will, presumably, take home a fat fee irrespective of the outcome?

How many Grey clients are fighting off approaches from rival agencies, which are using the uncertain future as a lever to unsettle Grey's hold on those relationships?

How many key personnel from Grey will be lunching with head-hunters, looking for a more appealing future?

Is there a more private agenda? Those close to the company are confident that Meyer's health remains excellent, although he may be getting just a little tired of the daily grind. It is hard to understand why anyone would take the risks Meyer has. Either he will be lucky and pocket lots of cash or he will suffer a public humiliation.

It is equally hard to believe that Meyer would eagerly give up his massive package of salary and benefits, which totalled $5.8 million last year.

And perhaps therein lies a clue. He may expect to persuade a buyer to keep him on, and that may even be desirable - for a little while anyway.

After all, he is still crucial to the relationships with the handful of blue-chip clients, such as Mars, Procter & Gamble and GlaxoSmithKline, that generate much of Grey's profit.

Any such expectation may have proved difficult for the likes of WPP's Sir Martin Sorrell, Omnicom's John Wren or Levy to swallow in the past.

After all, it is hardly feasible to pay top dollar for a company with profit margins that are seriously depressed by the takehome pay of the person who holds all the key roles of chairman, president and chief executive.

Indeed, even after his retirement, Meyer's current contract entitles him to remain a consultant at the rate of $10,000 a month, as well as enjoy a massive range of perks that include an office suite, cars and secretaries. And that is on top of a fat pension.

Then there is the question of succession. Under such a dominant personality, it would be almost inconceivable that a strong team of successors would have emerged. Such people typically become frustrated and leave.

And Meyer certainly dominates. On top of his chief executive role, he holds nearly 17 per cent of the ordinary "common" stock, plus 58 per cent of the class B stock. Together that gives him about 45 per cent of the votes, to which may be added his influence over 16 per cent of the votes available to the employee stock ownership plan.

Succession problems may be tricky when a sale is contemplated, but they would be more of a worry to the investment community if the group remained independent. Nevertheless, a public auction does not seem to be a way to resolve the issue.

But it would offer an exit route for Ariel Capital Management, an investment fund that has built up a 34 per cent stake in the common stock. Under the current management, outside shareholders have done poorly. Profit margins have bumbled along between 1.7 per cent and 5.7 per cent, compared with nearer 15 per cent achieved by the best performers.

All that can be said about Grey's appalling profit record is it is getting better. And it clearly makes sense to sell on the back of a rising trend, even if the starting point was a dismal $24 million loss in 2001.

However, Grey does have some good financial features. The public relations network is a solid earner. The New York advertising agency is thought to be highly profitable (although some people say this is partly owing to a reluctance to share an adequate proportion of clients' income with other offices servicing them around the world). MediaCom seems to produce very healthy profit margins and cash flow. And the group has a strong balance sheet showing net cash balances of $150 million. That cash would prompt much salivation among the global groups, all of which are looking rather heavily borrowed at present.

But why should WPP, Omnicom or a rival holding company pay a lot of money to win the clients they are even now courting? And isn't Grey's baggage too great for any of those groups to take the financial risks involved in a takeover bid?

Grey's market capitalisation jumped above $1 billion last week, putting a multiple of 38 on last year's post-tax profits. To justify that valuation, profits would have to triple quickly. With or without a very fit 77-year-old Meyer still presiding over the empire, that's a challenge few experienced operators would find appealing.

However, there may be someone outside the sector who has the appropriate mixture of naivety and commercial arrogance to take Grey on. A US business operating in digital technology, perhaps, or a content producer in the entertainment sector? Some such companies still have shares that enjoy inflated market prices but whether they have the ability to manage Grey is another matter.

On the face of it, Meyer is destabilising clients and staff in the hope he can get a good deal for himself. He will need to do that very quickly if the business is not to unravel before his eyes. But then it is just possible the entire exercise is an attempt to improve on an offer that was already being negotiated before the auction was announced.

Bob Willott is editor of Marketing Services Financial Intelligence ( and a special professor at the University of Nottingham Business School.

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