Analysts' Views: Integration key to deal's success

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wpp group has acquired some useful assets, but it's also bought an integration headache just as it clears the last pangs of Young & Rubicam's integration.

Analysts say the price is right, if WPP can pull off the integration of Bates into its existing networks without losing more clients and key talent. But they add that's a big "if," especially in the current touch-and-go economic climate.

Indeed, some financial observers were left shaking their heads at the sight of a bidding war for Cordiant Communications Group, what they would most charitably describe as a distressed asset.


"I don't think it's the right time to take over or inherit somebody else's problems," said one New York-based analyst.

The prognosis is not entirely grim. Susan Hunter and Albert Hoffman, analysts for credit-ratings agency Fitch Ratings, noted in a report that the deal helps WPP with its previous aims to reduce its dependence on U.S. and traditional advertising revenue.

Bates' strength in Asia and Cordiant's healthcare communications holdings make it an attractive buy, and with both Pfizer and British American Tobacco as common clients, WPP could consolidate even more billings from these marketers, said David Doft, advertising analyst at CIBC World Markets, New York.

One London analyst noted Cordiant will have the lowest ratio of net debt to EBITDA-earnings before interest, taxes depreciation and amortization-in the industry after it completes planned asset sales, making it a good buy from a strict valuation standpoint. But the analyst added digesting Bates will be a challenge because the network is clearly in decline.

"It's cheap because it comes with a lot of baggage," he said.

In a conference call with analysts, Group Chief Executive Martin Sorrell said WPP has discussed the deal with key Cordiant clients and secured their support, and any conflicts will be addressed during the integration. WPP expects to complete the deal in August. It will be "very flexible" in its plans to accommodate conflicting accounts, said Mr. Sorrell.

"The two key determinants are clients and people," he said.

Analysts wonder if WPP privately expects more client losses as it integrates Cordiant. During the call, SG Securities analyst Anthony de Larrinaga questioned WPP's estimate that Cordiant will contribute 300 million pounds-$500 million-in revenue to WPP in 2004 as too low. His calculations suggested a higher revenue number based on asset disposals and client losses already announced. Mr. Sorrell responded that WPP's forecast factored out those losses and adjusted for foreign currency fluctuations, plus some "adjustments we made just being cautious."

Caution is going to be the word until Cordiant feels the full effect of its recent client losses and asset sales, said Mr. Doft.

"The jury's going to be out on this deal for a few quarters," he said.

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