WPP to Buy Young & Rubicam for $4.7 Billion

May 11 2000

The WPP Group , one of the nation's largest advertising holding companies, reportedly has agreed to acquire the nation's largest independent ad firm, Young & Rubicam , for $4.7 billion.

If the deal goes through, it will say a lot about the state of Internet advertising on Madison Avenue - but only because it means so little.

Although analysts say the purchase of Y&R would make WPP the world's largest advertising company, the combination would not significantly affect interactive marketing. Both companies view their Internet holdings merely as tools to serve their mainstream clients and their larger marketing units, rather than as a distinct, dynamic and increasingly dominant medium.

"We're trying to integrate the various portfolio companies that we've invested in into the core service offering to our clients," says Steve Blondy, a Y&R executive who manages the company's strategic investments. "We don't manage our business based on the media through which we send our messages."

Traditional advertising companies strive to achieve a wide range of offerings, with the goal of becoming a one-stop shop for clients. But many Internet analysts feel that big-name ad agencies have been slow to embrace the Web as an additional advertising channel and that they don't understand key differences between marketing online and offline.

Such criticism might explain Y&R's initial difficulties with the Net. In September, the company traded its interactive agency, Brand Dialogue, for a 20 percent stake in Dallas-based Luminant, a new Internet marketing-consulting firm. Since then, Luminant's shares have fallen from their IPO price of $18 to close at $8.19 on Thursday, a 54.5 percent decline in value.

But by the end of 1999, the agency created Y&R 2.1 to integrate its online and offline work, and since then, it has made close to $50 million in minority investments in nonpublic interactive and technology firms.

About the same time, Y&R also created The Digital Edge, an interactive media buying and planning outfit, and the group has generated $50 million since November 1999 from blue-chip clients like ATT , Campbell's, Chanel and Met Life. In addition, Blondy said that during the past 12 months, Y&R landed more than $200 million in Internet-related billings from clients like AT&T Worldnet; Reader's Digest Web site, Gifts.com; and Geocities.

WPP, for its part, created WPP.com six months ago as a vehicle for making Internet-related acquisitions and investments on behalf of its companies, helping them develop their Internet marketing capabilities. Whatever comes of that effort, however, will go right back to the company at large.

"We don't want to separate our Web business from our core businesses because we think it's a core capability," says WPP.com CEO Eric Salama. "So the first thing we do is to help the company change its culture, to Web enable the company."

WPP's holdings include marketing-consulting firm OgilvyInteractive, online branding firm JWT and more than a dozen other Internet-related marketing firms. In 1999, WPP generated $500 million in revenue from online marketing and offline work for Internet companies, Salama said.

But a combined WPP-Y&R entity would still lack clout when competing against newer Internet marketing firms for business, because of its old-media culture and lack of technical expertise, said Kathy Biro, president of Digitas , a Boston-based Internet marketing-consulting firm.

"I see them as Johnny-come-latelies who are late out of the box and [lack] the real hard-core technology underpinning," she says. "They are in the business of creating an emotional bond through unmeasurable media, and Internet professional services firms are in the business of building customer relationships through measuring transactions."

When asked to rank on a scale of 1-10 the importance of a WPP-Y&R deal to the Internet advertising industry, Kyle Shannon, chief people officer at New York-based Internet professional services firm Agency.com, gave it a 3. A merger might increase competition in interactive marketing, he says, but only if the management at Y&R's interactive units remains steady.

"What you have is two fairly traditional companies coming together," he says. "Bigger is not necessarily better in this environment."

Wall Street doesn't seem to be in love with the potential deal, either. Since reports surfaced that WPP had agreed to acquire Y&R, shares of both companies have fallen. WPP Group stock lost 15.9 percent of its value between the end of trading on May 5 and the end of trading on Thursday, falling to $63.50 from $75.50, while Y&R shares lost 11.1 percent in value, falling to $48.13 from $54.13.

Without a definitive agreement in place and with the value of the deal rapidly declining, Paris-based ad firm Publicis reportedly has re-entered the fray, holding informal talks with Y&R about an alternative deal. Even if Publicis loses out, its ambitions could hold up any possible union between WPP and Y&R, which might give the companies time to get an Internet strategy.