WPP Chief Notes High Staffing Costs at Grey


Actual Sale Stock Value Still Fluctuating

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NEW YORK (AdAge.com) -- WPP Group's $1,005-a-share offer for Grey Global Group could be a little less grand -- and be worth less than a grand -- for Grey shareholders.

The British ad firm, confirming details of the acquisition yesterday, put the deal's initial value at $1.52

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billion for Grey shareholders based on the value of shares Sept. 10, the last trading day before WPP and Grey signed the papers.

Daily fluctuation
But the value coming to Grey shareholders will fluctuate each day depending on the price of WPP stock. That's because WPP is buying half of Grey shares for cash (at $1,005 a share) and half for WPP stock (worth $1,005 a share Sept. 10). The exchange ratio of WPP shares for Grey shares is fixed.

WPP shares slipped 2.5% yesterday after the deal was officially announced, so its effective value to Grey shareholders at the end of the day was $997 a share or $1.51 billion, according to Advertising Age's analysis.

Investors are still evaluating the deal. Grey stock closed yesterday at $977.30, up $37.90, on record trading volume of 327,000 shares.

Final value
Shareholders of New York-based Grey won't know the final value until they see where WPP shares trade the day the deal closes, expected in December or January. If WPP then is trading higher than it was Sept. 10, the effective blended value of cash and stock for Grey shares will be above $1,005; if WPP trades lower, the value will be lower.

Grey shareholders can choose cash or stock. But WPP's actual payout of cash and stock will be prorated so WPP ends up paying for Grey with the package of $760 million in cash and fixed number of WPP shares that it disclosed yesterday.

All through Grey's summer auction, close deal watchers said Ed Meyer, Grey's chairman-CEO and controlling shareholder, would want as much cash as possible for his 20%-plus stake, worth some $300 million. Will he ask for cash or WPP stock? "I have no view at all," Mr. Meyer said yesterday on a conference call that WPP held to brief analysts. "I haven't even thought about it at this point."

Sluggish profit margins
With the official announcement of the deal yesterday, details are beginning to emerge. On the conference call, WPP Chief Executive Martin Sorrell and Finance Director Paul Richardson pressed the case that WPP can quickly turnaround Grey's sluggish profit margins.

Grey operating profits as a percent of revenue were a weak 5.7% last year. By contrast, WPP's reported operating profits last year were 13%, tracking closely with margins at rivals Omnicom Group and Publicis Groupe.

But Grey results improved in the first half of this year, and Mr. Sorrell said Grey is on track to deliver operating margins of 8% to 8.5% in 2004 -- with a target after the acquisition of 10.5% in 2005 and 11.5% in 2006.

Would be remarkable
That would be a remarkable turnabout for Grey, whose margins have been below 8% every year since 1993. But miracles can happen. Young & Rubicam, for example, went from a 5.1% margin before going public in 1998 to a 12.1% margin before WPP bought it in 2000.

WPP believes it can boost Grey's bottom line in part by managing the books to pay lower taxes, and it expects to improve operating margins through cost-cutting by integrating Grey's real estate into WPP's portfolio, combining computer systems, combining Grey purchasing with WPP's procurement -- and, most important, through "staff productivity."

Staff cuts
WPP didn't broach Grey staff cuts, but Mr. Sorrell noted Grey's labor costs as a percent of revenue are well above those at WPP and its key rivals.

WPP also hopes to grow margins by growing revenue -- both by selling more WPP services to Grey's clients and by looking for growth at Grey.

WPP confirmed Grey will continue to be run by Mr. Meyer, 77, who signed a new contract extending his term at least through December 2006. Said Mr. Sorrell: "There's very little integration that will take place. We will keep Grey Global Group as a unit. The operating units will remain separate and will continue to report to the CEO of Grey -- that's Ed."

The sale of Grey is a big deal for Mr. Meyer, who has run the company since 1971 and whose shareholders will end up owning 6.5% of WPP.

It's a smaller deal for Mr. Sorrell, who over the past two decades turned basket maker Wire & Plastic Products Plc into the world's second-largest advertising holding company through acquisitions of blue-chip firms such as J. Walter Thompson Co., Ogilvy & Mather Worldwide and Young & Rubicam.

WPP's long-term goals
Mr. Sorrell acknowledged that Grey, with its primary presence in Europe and North America and its mix of advertising and other services, will do little to advance WPP's three long-term strategic goals: Grow revenue in developing nations to one-third of revenue; grow marketing services (work outside advertising and media) to two-thirds of revenue; expand quantitative disciplines (direct, Internet/interactive, information/research, consulting) to half of revenue.

"Much is being made about whether this [acquisition] is a must have or a nice to have," Mr. Sorrell told analysts. "Much is being made about whether it fits in strategically or not. It really doesn't move the needle much one way or the other."

But it's still a good and important deal, Mr. Sorrell contends. "Impact on our three strategic goals is largely neutral, but we do think there's a significant enhanced opportunity for revenue growth not only in advertising but in public relations, in health care, direct, Internet/interactive and, probably most important of all, in media investment management."

Mr. Meyer, who ran publicly traded Grey almost as a closely held company for decades, is having to come to grips with all the post-merger disclosures and grilling from stock analysts. At the end of yesterday's analysts' teleconference, Mr. Sorrell in London thanked Mr. Meyer in New York. "You're welcome," Mr. Meyer replied. "It was an experience for me. I can see now why we didn't do these things."

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