WPP, Y&R sign merger agreement

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WPP Group, London, notified the London Stock Exchange May 12 that it and Young & Rubicam, New York, have signed a definitive merger agreement, valuing WPP's purchase of Y&R at $4.7 billion. However, the U.K. holding company's share price continued to slip in London trading May 12, reducing the value of the deal to Y&R shareholders.

The all-stock acquisition was unanimously approved by both companies' boards. The companies plan to publish detailed information on the merger for their shareholders in two to three months. Subject to approval by WPP and Y&R shareholders and regulatory authorities, the closing of the merger is targeted for this autumn.

All Y&R operating companies will continue to be run from their current headquarters in the U.S. and will operate separately from WPP ad agency networks J. Walter Thompson Co. and Ogilvy & Mather Worldwide.

Y&R CEO Thomas Bell will become chairman of Young & Rubicam on an interim basis, though Mr. Bell announced May 12 he would leave the company sometime after the acquisition is complete. (It's believed that under WPP's original offer, Mr. Bell would have become chairman of WPP.) During a news conference after a Y&R shareholders meeting in New York, Mr. Bell said: "Every organization needs a clear leader. And in my view, [WPP Chief Executive Martin Sorrell] has proved himself more than capable of leading WPP into the future very successfully.''

Y&R Vice Chairman-Chief Financial Officer Michael Dolan will become CEO of Young & Rubicam. Y&R Chairman-Chief Creative Officer Ed Vick immediately becomes chairman-CEO of Y&R Advertising, the core ad agency unit of Y&R. A four-person transition committee consisting of Mr. Bell, as chairman, and Sir Martin, Mr. Dolan and WPP Finance Director Paul Richardson will oversee the transition as Y&R becomes part of the WPP Group.

Five Y&R directors will join the WPP board. The names of those directors were not immediately disclosed.

Senior Y&R operating heads have signed employment agreements. A group of senior Y&R executives has also signed agreements barring them from selling two-thirds of their Y&R shares (and, following closing, their new WPP shares) for one year from the date of the merger agreement.

Lorna Tilbian, a media analyst with stockbroker WestLB Panmure in London, said the merger creates "the gold standard in the industry.'' Under one roof, WPP will "have the best names'' in all the marketing disciplines, such as below-the-line, media buying and direct marketing, she explained.

In early trading May 12 on the London Stock exchange, WPP's share price fell 1.18%; in the U.S., Y&R was up 4.59%. Ms. Tilbian attributed the early slippage to the fact that analysts hadn't yet heard WPP's presentation on the benefits of the merger. She said it will take several days for the market to absorb the information. At the London market's close May 12, WPP's stock was down nearly 5%. A declining share price in the all-stock deal is one of the reasons there's been a delay in reaching a merger agreement.

Ms. Tilbian said the deal will add value, especially if WPP eventually decides to merge the two parties' media buying operations. Y&R owns the Media Edge, the world's fourth-largest media buying and planning specialist with 1999 billings of $11.1 billion. WPP already owns MindShare, the world's largest media specialist with 1999 billings of $17 billion.

The merger would create the world's largest communications services group, leapfrogging WPP from the third-largest advertising organization in Advertising Age's latest ranking into the top slot, ahead of current No. 1 Omnicom Group and No. 2 Interpublic Group of Cos. On a pro forma basis for the year ended Dec. 31, 1999, the combined group had revenues of $5.2 billion.

Under the terms of the definitive agreement, each outstanding share of common stock of Y&R will be converted into 0.835 of a WPP share, regardless of the price. The new WPP will then be owned approximately two-thirds by current WPP shareholders and one third by Y&R shareholders. Based on WPP's closing share price on May 11 of $63.50, the merger represents a current value for each Y&R common share of $53.02 and values Y&R on a fully diluted basis at $4.7 billion. Y&R currently has 72.2 million shares in issue, plus some 22.7 million options currently exercisable or becoming exercisable on completion of the deal.

Among the situations in which the merger agreement could be terminated include: if either party's shareholders do not approve; if the other party's board recommends another acquisition offer; if the board of the other party withdraws or adversely modifies its recommendation of the merger at a time when another acquisition offer for that other party is pending; or if the merger is not completed within nine months of signing.

WPP said the deal will save the companies in excess of $30 million a year, and anticipates the acquisition will add to earnings per share one year after completion.

Among the benefits of the merger, WPP said, the combined group becomes No. 1, No. 2 or No. 3 in every major geographic market. The broader client portfolio and wider array of communications services also enhance long-term revenue growth prospects. WPP said it has already identified potential cost savings of $30 million.

Sir Martin said of the merger: "The two organizations are highly compatible. We share a common philosophy and culture of providing clients with integrated solutions to their marketing needs, and seek to add value to our clients and our people. At the same time, the two complement one another from a client, functional and geographic point of view.

"As a part of our focused strategy to provide clients with a full spectrum of services to meet every communications need, we look forward to developing the strengths of the services provided and the geographic reach that Y&R will bring to WPP. Together we have the people and assets to create significant growth and value for our clients, our people and our shareowners."

Y&R's Mr. Bell added: "Young & Rubicam's success over the past few years is a reflection of the differentiating power of our integrated communications model. Going forward, we want to take this competitive advantage to the next level - to build the first Web-based marketing communications company that can create, assess and refine marketing programs in real-time with the speed required of our clients by our new economy.

"By joining forces with WPP Group, we can accelerate that vision. The fit between our companies is terrific, with leading brands in every marketing discipline. Y&R clients will benefit from access to new capabilities, as well as the additional reach and clout that we'll enjoy in the marketplace."

In addition to putting three ad agencies together under one holding company, the transaction will bring together four of the world's largest public relations agencies: WPP's Hill & Knowlton and Ogilvy Public Relations Worldwide and Y&R's Burson-Marsteller and Cohn & Wolfe, as well as Y&R's Impiric (formerly known as Wunderman Cato Johnson) and WPP's OgilvyOne, both leaders in direct and interactive marketing.

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