CLOSE-UP: Does Y&R need to do a deal to stay competitive? - Live Issue/Young & Rubicam/With shares in the agency tumbling, a sell-off looks likely, Emma Hall reports

It seems that nobody is prepared to let Young & Rubicam continue as the world’s fifth largest agency.

It seems that nobody is prepared to let Young & Rubicam continue as

the world’s fifth largest agency.



All eyes are on Y&R as Sir Martin Sorrell, the chief executive of WPP,

circles around his US-based prey. Every move of the Y&R share price is

monitored by analysts, who are anticipating a WPP swoop at any

moment.



In reality, talks between the two have been going on since last year and

the two sides are still a long way from agreement, although some

shareholding Y&R senior executives are known to be keen to do a

deal.



Y&R would be a logical fit with WPP. The two share major clients - Ford

and Kraft General Foods - and the cultural match with J. Walter Thompson

and Ogilvy & Mather (WPP’s agency networks) is comfortable enough.



The major reservation expressed by observers is that neither Y&R nor WPP

has the depth or strength of management to make the deal a success.



A question mark also remains over whether Ford would be happy to have

all its eggs in one basket.



WPP is number three in the global league table behind Omnicom and the

Interpublic Group. A Y&R deal would leave Sorrell’s competitors in the

shade at a time when global domination is becoming an end in itself for

communications networks. Observers are not ruling out a hostile bid from

Sorrell.



But why all the fuss about selling out? Y&R is a successful business

which has delivered the numbers every quarter since it went public in

May 1998. The company could be valued at around dollars 4 billion if a

deal went ahead.



Thanks to the success of its Dentsu tie-up, Y&R has weathered the recent

storms in Asia better than most agencies and its performance in Europe -

where it is the number two network - is stable and strong.



Y&R doesn’t have to sell but neither can it afford to stand still, so

some sort of deal seems inevitable. Ever since 20 per cent of the

company went public in May 1998, subtle changes have left Y&R open to

the possibilities that Wall Street has to offer.



Apart from the launch of the Media Edge (its global media company) Y&R

has remained superficially much the same company. The changes have been

among the senior managers, a good number of whom have retired on their

windfalls.



Peter Georgescu, the chairman and chief executive, retired at the end of

1999 after 36 years with the company. Joe de Deo, the vice-chairman,

retired last summer after 38 years. President John McGarry - described

by one rival as a ’titan of account management’ - and Fernan Montero,

Y&R Europe’s chairman and chief executive, also bowed out last year.



The departure of these Y&R stalwarts leaves the company ripe for change

but the strong-minded Tom Bell, who took over as chief executive at the

start of the year, is thought to be reluctant to hand over power without

having made his own mark. He has already protected his senior executives

with a timely new severance plan which would make forced redundancies

time-consuming, destabilising and very expensive.



MT Rainey, the joint chief executive of Y&R in London, says: ’Bell is

just as hard a deal maker as Sorrell. Y&R has a strong European network

with huge below-the-line capabilities and the acquisition of Rainey

Kelly Campbell Roalfe has given it a talent injection.’



However, despite seemingly healthy figures, Bell has inherited a Y&R

that has a few engineering problems. It is perhaps not as robust beneath

the surface as it would like to be, although it is not a company in

crisis.



The agency was accused of preparing for its initial public offering by

taking on some big clients at very low commission. The overall margins

are protected by the success of its direct marketing and public

relations operations but the advertising business has suffered some

blows of late, in particular the loss of the US Army, the US Post Office

and the Blockbuster video accounts.



’Flotation took more management time and energy than anyone dreamt it

could,’ a Y&R insider says. Citibank, which was the largest advertiser

to centralise a global account when it moved wholesale into Y&R less

than three years ago, is already reviewing its dollars 500 million

business.



The Y&R share price, which reached a peak of dollars 72 in late

December, is now down to just over dollars 40, but the shares are still

trading at almost double the issue price of dollars 25, so the recent

fluctuations are no indication of a dramatic fall from grace.



Shareholders, however, will be pressing Y&R to deliver ever-increasing

value and a deal with WPP would be an obvious step towards this.



’It would be a marriage without sexual attraction,’ one industry

observer comments. ’They would be doing it just because it makes sense

to get married.’



There are other possible partners for both WPP and Y&R. Sorrell could go

for an alternative independent network such as Bates, while Y&R could do

a deal along the lines of last year’s B COM3 tie-up between the MacManus

Group, Leo Burnett and Dentsu.



Rumours have also surfaced of a deal between Y&R and one of its global

clients, Arthur Anderson. Such a deal would certainly shake up the

communications industry and, as Arthur Anderson is a private company,

shareholder value would not be such an influence as it would be with a

WPP deal.



It seems inevitable that significant change awaits Y&R, but there is

still a lot of negotiating to do and a lot of potential partners to

negotiate with.



Perspective, p16.