The agency organization is big (the seventh largest in the world), profitable (net income was up 60% to $31 million in the first quarter) and global (280 offices worldwide). It doesn't have a second agency network but it doesn't feel it needs one. It has installed an anti-takeover provision to ward off hostile overtures.
It was only two years ago when Y&R went public, and its stock reached more than $70 a share at the end of last year. The stock hit about $40 in early March, and has gyrated all over the place since word leaked out that the agency was in talks to be acquired by WPP Group. WPP's offer valued Y&R at about $70 a share, a price it had already hit on its own.
After the WPP talks broke down (partly because of some "golden parachute" deals for top Y&R executives), Y&R initiated discussions with French agency group Publicis, which isn't even as big as Y&R, and would probably pay less than WPP.
But Ford Motor Co., one of Y&R's major clients, made it clear it would not favor Publicis' acquisition of Y&R since Publicis handles rival car marketer Renault. (Publicis agencies in the U.S. also handle General Motors Corp.'s Saturn and BMW of North America.) And then on May 1 WPP's board said "the discussions with Y&R have terminated."
No matter what else happens in this strange saga, the question remains: Why does Y&R feel it's such a necessity to be acquired?
The agency is clearly big enough and global enough to handle any client anywhere. Clients have not been knocking down Y&R's doors demanding it get bigger. As a matter of fact, worldwide toiletries client Colgate-Palmolive considers Y&R "a truly global and motivated partner."
It's said Y&R wants to make a deal because it doesn't want to be left out of the inevitable and ongoing industry consolidation, where the biggest clients pick the biggest agencies. The top agency groups -- Omnicom Group, Interpublic Group of Cos. and WPP -- have annual gross income between $4.8 billion and $5.7 billion. Slightly smaller than Y&R's $1.87 billion in gross income are Grey Global Group and True North Communications. All of them, I submit, are plenty big to handle any brand in the world, and they do.
Consolidation, it seems to me, means different things to different people. To Wall Street, agency consolidation means their stocks can gain the critical mass to be included in some major indexes, as Y&R and WPP are, giving the stocks a big push upwards (at least for a while).
But to clients themselves, agency consolidation holds very little meaningful value. As one agency executive asked me, what's more important: the size of the holding company? Or the various brands in the holding company that deliver service to clients?
To Wall Street, the answer is the size. To clients, the answer is the quality of service delivered.
From this perspective, Y&R's drive to be acquired is not client-generated. Y&R management has concluded that WPP stock or Publicis stock will appreciate at a faster clip than their own, and so they're willing to make the swap.
Now is not the best time for the agency to make a deal, however. All agencies go through up cycles and down cycles, and Y&R is now in a down cycle, what with the loss of the U.S. Army and H&R Block and trouble with Citibank, and (rumored) KFC. And Martin Sorrell of WPP has been very astute at making himself look like the aggrieved party in the negotiations, claiming that Y&R top brass changed crucial elements of the deal at the eleventh hour. All of this puts pressure on Y&R to do a deal at all costs, and it seems that's Y&R's intention.
There's one more consideration here. If in desperation Y&R goes forward with Publicis, and Ford fires Y&R, then other agency groups with competing car accounts would step up to the plate.
So all of a sudden Y&R could find itself the belle of the ball, and that could help to explain why Y&R is such an eager partner.