|Martin Sorrell, chief executive of WWP Group, which is making a play for South Korea's No. 2 ad agency.
Until recently, the biggest Korean agencies were owned by powerful conglomerates, known as "chaebols," that are now under pressure from the government and banks to focus on their core businesses and divest other assets such as in-house ad agencies. That sell-off has allowed multinational agencies, which controlled just 7.6% of the Korean ad market in 1998, to increase their share to 36% last year and at least 47% this year, according to the Korean Federation of Advertising Associations.
Stake valued at $42 million
WPP's acquisition of the 31% stake in LG Ad held by LG Group's two founding families, the Koos and the Huhs, will give WPP management control; the deal is expected to be completed in a month or two. The purchase price could not be learned, but based on market capitalization the 31% stake is valued at $42 million.
LG Group makes everything from consumer electronics to chemicals, and sells LG cosmetics in Asia.
The company's "restructuring plan requires LG Group to sell its ad agency," said Han Seung Ho, an advertising analyst at Hyundai Securities. "The ad business is not a core business line for the group."
An LG executive confirmed the agency is "positively engaged in negotiations" with WPP. The agency holding company had no comment.
Inside track to global ad dollars
Not only is South Korea the world's 10th-largest ad market, it's one of the few countries where ad spending, expected to reach $5 billion this year from $4.4 billion last year, is growing rapidly. Multinational agencies hope that buying the in-house agency of a Korean marketer with a big global ad budget will give them the inside track on those ad dollars. LG Group, for instance, spends about $200 million outside Korea, divided among many agencies.
But South Korea is full of pitfalls. The biggest problem in buying an in-house agency with one big client is hanging on to that client when it no longer owns the agency. About $400 million of LG Ad's 2001 billings of $492 million are from LG Group, although the agency also handles Nike, Korean Air and local banks.
"The only question is: For how many years WPP will be guaranteed the advertising of LG Group's subsidiaries?" said Kim Byung Gook, an advertising analyst at the Daeshin Economic Research Institute in Seoul.
Contracts frequently require the seller to commit to keeping its business at the acquired agency for three to five years. Last year, for example, WPP bought Ad Venture, now merged with J. Walter Thompson Co., with a guarantee that one of its clients, consumer-goods marketer Aekyung, would stay for seven years.
"Without this guarantee, WPP cannot be confident about its success in Korea," Mr. Kim said of the current negotiations with LG.
Others believe a client is likely to be eager to escape when the contract ends. "What happens after they're forced to work with you for five years?" said one Korean adman. "The client will probably leave for the sake of freedom, and you've bought a five-year company. It's a bad strategy."
And it doesn't always work. In the first big chaebol sell-off, Cordiant Communications Group bought 80% of Hyundai Group's in-house agency, Diamond, for $100 million in an effort to build Hyundai cars into a global client for Bates Worldwide. But after members of the Chung family that controls Hyundai Group had a falling out, the family members in charge of the car group were no longer the ones involved in the ad agency.
Bates lost its U.S. Hyundai business earlier this year, and other agencies are chipping away at the Korean account, despite a contract signed in 1999 guaranteeing Diamond Bates the business for five years. This year Diamond Bates lost pitches for two Hyundai models, Verna and Avante, to other agencies.
Lee Young Bok, a Hyundai general manager, said the idea is to "step up competition for Hyundai Motors' ad [business] so that we get the best services."
Most of the agencies still controlled by chaebols are small ones, except Samsung-owned Cheil Communications, and Daehong Communications, South Korea's No. 1 and No. 4 agencies, respectively. Cheil, considered part of Samsung's internal marketing efforts and intent on building its own international network, isn't for sale. Daehong's future is unclear. Daehong is owned by Lotte Group, a Korean-Japanese conglomerate active in areas as diverse as confectionery, hotels and retailing.
Cheil: an agency and a client
Cheil had billings of almost $800 million in 2002 and is the only Korean ad agency with international offices, set up to handle parent Samsung Group's consumer-electronics and telecommunications businesses. Interpublic Group of Cos.' Foote, Cone & Belding Worldwide is the global agency for Samsung's estimated $400 million account, but it has to work with Cheil as both a rival agency doing Samsung advertising and as the client, representing Samsung.
"Cheil will never be sold," said a Korean adman.
Because so much ad spending has been controlled by the chaebols, South Korea has few independent agencies. The only multinationals who have linked up with independent agencies are Publicis Groupe's Publicis and Omnicom Group's DDB Worldwide. Publicis, which owns few top 10 agencies outside of France, ranks sixth in Korea after buying the largest independent shop, Welcomm, to form Publicis Welcomm. Even rarer, DDB formed a joint-venture called Lee & DDB with one of South Korea's leading account executives.
LG, like other Korean shops, has no international network. Industry executives familiar with the WPP deal said LG is likely to work closely with Young & Rubicam and use Y&R's network. JWT has been merged into Ad Venture to form WPPMC Korea and Ogilvy & Mather Worldwide has international accounts that are potential conflicts with LG, including IBM Corp. and Motorola. Y&R handles Sony Corp. in the U.S., but LG isn't very active in the U.S. market.