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It was one of the best-kept secrets in advertising. While the ad world kibitzed about Interpublic Group of Cos.' talks to acquire MacManus Group, executives at MacManus quietly hammered out an equity swap with Leo Group that creates the world's fourth-largest advertising company.

MacManus and Leo, the two largest privately held agency holding companies, will join forces under a new umbrella -- temporarily titled BDM. The company likely will go public next year and could command a stock market valuation of $3.6 billion to $5.4 billion, or two to three times revenues.

Tokyo-based Dentsu has infused cash into the deal and will take a 20% stake in the merged operation, which, based on 1998 figures, will have gross income of $1.8 billion.

The massive deal came together at a fast and furious pace. Incoming Leo Group CEO Roger Haupt set the spark with a late September phone call to MacManus CEO Roy Bostock. Mr. Haupt suggested the executives get together to discuss a possible merger. The following Sunday, the duo met in a back room of the Blindbook Club, a golf resort in Purchase, N.Y.


That meeting was the first of many. For the next six weeks, executives at Leo, MacManus and Dentsu would lob phone calls back and forth and secretly rendezvous. One confidential early morning meeting took place in the Plaza Hotel. While MacManus Chief Operating Officer Craig Brown dined on corn flakes, he and Mr. Haupt discussed a possible management structure of the new behemoth.

By the week of October 17, most of the merger details had been worked out. Mr. Haupt flew to New York to iron out some remaining wrinkles, and seven days later, Messrs. Haupt and Bostock spoke on the phone to reach the final verbal agreement. Mr. Bostock hung up, satisfied with the deal, and poured himself a glass of Bordeaux.

The next morning, executives at the agency groups contacted common clients such as Procter & Gamble Co., Philip Morris Cos., Coca-Cola Co. and General Motors Corp. to update them on the situation.


By the beginning of last week, the merger was a done deal.

"We knew we had to move rapidly," said Mr. Bostock. "I got so sick of the speculation about us and IPG, or us and whomever."

Mr. Bostock becomes chairman of the new Chicago-based holding company, while Mr. Haupt shifts to the CEO post. Richard Fizdale, current Leo chairman-CEO, moves to vice chairman of BDM, while Mr. Brown becomes president and chief operating officer. Agency brands such as D'Arcy Masius Benton & Bowles and Leo Burnett Co. are expected to remain, according to Mr. Haupt. It hasn't been determined if the Leo Group and MacManus Group names will remain.

Although MacManus was reportedly in negotiations with Interpublic, and even rumored to have been approached by Grey Advertising, Mr. Bostock denied he was in serious talks with any other suitor.


There never was a bidding war," he said. "MacManus was never on the block."

But others familiar with the negotiations maintain nothing was final until November 1. Prior to that, Leo executives feared their offer would be rejected, worrying that IPG Chairman-CEO Philip Geier would raise his bid if he realized the extent of Dentsu's involvement.

MacManus and Burnett have flirted before. Last year, the two announced a worldwide merger of their media operations, but the deal fell apart due to what Mr. Bostock deemed "philosophical differences."

Mr. Bostock likens this merger to a rekindled romance: "You're dating someone, then you part ways, and a year later, you wake up and say, 'Hey, I had something pretty good there.' "

With the new deal, Leo and MacManus retain some of their independence and respective cultures.

"It makes so much strategic sense," said Mr. Haupt. "[We're] compatible in culture, have common clients, and the philosophy of the importance of creative people is something that Dentsu and MacManus share with us."


Prudential Securities analyst James Dougherty said Leo and MacManus could have gone public separately, but they wouldn't have raised as much capital. Leo and MacManus each had become about as big as they could without linking to another agency or undergoing an initial public offering solo.

Another reason Burnett may have resisted going public earlier is that about 30% of its revenues -- and an estimated $100 million in profit -- come from Philip Morris. That exposure to tobacco money was regarded as a liability were Burnett to have gone public by itself.

Now that Burnett and MacManus are merging, it reduces the tobacco marketer's contribution to the bottom line.

In addition to making strategic sense, the deal will give agencies some cash. Mr. Dougherty predicts BDM could raise an estimated $3 billion to $3.5 billion by going public; other estimates run as high as $5.4 billion.

"Advertising agencies are red hot," he said. "Any reasonable management would have to seriously consider [going public]."


Many MacManus and Leo clients applauded the merger. Procter & Gamble's Robert Wehling, global marketing officer, said: "I'm happy that they've done this, because I think it can lead to better, bigger ideas."

Phil Guarascio, VP-advertising and corporate marketing at General Motors echoed that sentiment. "We see this as very positive," he said. "Even though the agencies work separately, you still have access to cross-resources."

But as common clients hail the merger, industry observers and hungry new-business executives at other agencies are keeping a careful watch for client fallout. Burnett handles Delta Air Lines, while MacManus' N.W. Ayer & Partners and D'Arcy have Continental Airlines and Trans World Airlines, respectively. In the financial arena, Burnett handles Arthur Andersen and D'Arcy has competitor Ernst & Young. Burnett's client Allstate appears to conflict with the recently won Aflac at MacManus' Kaplan Thaler Group.

Most of those marketers say the agencies have to keep those businesses separate but equal.

"It's in the agencies' best interest to make that work," said Kathleen Spencer, exec VP at Aflac. "What's important to us is the confidentiality and the autonomy in the [merged] structure. . . . We're satisfied with that."

Fast-food could provide another conflict. Burnett handles kid-targeted creative for McDonald's Corp., while D'Arcy buys media for Burger King Corp. and handles local marketing projects.

"We are not anticipating any conflicts," said a McDonald's spokesman. "The fact there may be additional resources available through Burnett is certainly not a negative."

Mr. Bostock said he doesn't see a conflict between the two fast-feeders since their respective work will be handled out of different agencies. "They're under separate units, so it's not a conflict issue."

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