Terms of the deal, expected to close in the third quarter, were not disclosed.
After the announcement, Y&R's stock closed Friday at $33 per share, off 50 cents on the day. Leap's closed at $5.6815, off 6.25 cents.
Y&R is expected to use One World to build its portfolio of ethnic marketing shops, which include New York-based Hispanic agency Bravo Group and Asian-American shop Mosaica.
Leap bought YAR, a multicultural marketing agency, for $23.3 million in cash in April 1997 and Kang & Lee, an Asian-American shop, in November for $1.3 million in cash plus 40% of the shop's pretax profits over the next three years. It then merged the New York-based operations into One World.
REVERSAL FOR LEAP
The sale is a reversal for Leap, which had been positioning itself as an integrated marketing agency steeped in -- but not limited to -- new media. In a statement, Leap Group Chairman-CEO Fred Smith said the sale would give Leap capital to bolster its Internet-related revenue.
"We recognize that the Internet sector is an important part of our company's growth and we are making a conscious decision to redirect our resources in that direction," said Mr. Smith. Leap officials would not comment beyond the announcement.
Industry observers were skeptical, noting Leap Group has been in the red during the past year, after a $5.7 million loss for the first three quarters wiped out the small profits the company had managed in the previous two fiscal years. At the time, revenue from the acquisitions of Kang & Lee and YAR helped Leap increase revenue in quarters where it otherwise would have declined sharply as a result of client defections (AA, Jan. 26).
Leap eked out $133,000 in net income in the fourth quarter of fiscal '98, ended Jan. 31, thanks to cost-cutting and new clients, including Rockwell Semiconductor Systems and R.R. Donnelley & Sons Co. First-quarter '99 income was $14,986.
Leap overextended itself with acquisitions and new ventures after its 1996 initial public offering, said observers, maintaining the sale reflects the agency's ongoing cash flow problems.
REACHING TOO FAR
"They just reached too far with their IPO money," said a Wall Street analyst. While scrimping for cash and resources, the company is seeking to give its stock a lift by concentrating on Internet commerce, an area Wall Street views positively, said the analyst.
Y&R is expected to merge Kang & Lee with Mosaica, and YAR -- which has significant business from Y&R client AT&T Corp. -- will likely be folded into Y&R Advertising.
"It's clear that targeted, creative and effective multicultural communications are becoming increasingly vital to our clients," said Ed Vick, chief operating officer of Y&R.