Dentsu tries to avoid account conflict trap with Leo Burnett alliance

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TOKYO--Dentsu, Japan's biggest and the world's fourth largest advertising organization, announced December 9 it's in negotiations intended to "establish a business relationship" with Leo Burnett Co. The scale and structure of the relationship is still being discussed, but the companies confirm that Dentsu may buy a minority stake in privately-held Burnett.

Talks between the two companies about a possible link-up were first reported in the Sept. 7 issue of Advertising Age.

Any initial Dentsu investment in Burnett would be for no more than a 10% holding in the Chicago-based company, with the possibility to increase that to no more than 20% in the future, executives familiar with the talks said.

It's believed the Japanese advertising industry practice of allowing an ad agency to handle accounts of competing clients could restrict Dentsu outside its home market in this age of global account con-solidations. An alliance with Leo Burnett, the world's ninth largest network, would provide Dentsu with a third channel to service its clients internationally, where marketers are sensitive about account conflicts.

Currently, Dentsu has a small network of Asian, European and American agencies and it holds a half ownership in Dentsu, Young & Rubicam Partnerships. DY&R is focused on Asia/Pacific, where it services most Young & Rubicam clients. Outside Asia, DY&R's presence is restricted to Lord Group, New York.

Dentsu says in a statement it will "continue to maintain a strong and rewarding relationship" with Y&R through its alliance, which includes "the highly successful DY&R network.'' Y&R was unavailable for comment at press time.

"It is important for Dentsu and Leo Burnett to each have access to a multi-faceted global network with multiple agency brands," Dentsu says in a statement. "Maximizing the experience of both companies, Leo Burnett and Dentsu hope to build a structured but flexible relationship while maintaining the independence of each agency and respecting and understanding local cultures and resources throughout the world."

A link-up with Dentsu would give Burnett greater access to Japan's largely closed advertising market. Dentsu's domination of the Japanese advertising market is unmatched by any ad agency in any other major market around the world. Within Japan, Dentsu's 1997 gross income was $1.5 billion on billings of $11 billion, according to Advertising Age figures, followed by Hakuhodo ($777 million gross income on billings of $5.9 billion), Daiko Advertising ($204 million/$1.6 billion ), Asatsu ($198 million/$1.7 billion ) and Tokyu Agency ($192 million/$1.6 billion). Although Leo Burnett's existing Tokyo-based Leo Burnett - Kyodo Co. is Japan's 18th largest agency, it only has gross income of $38 million and billings of $249 million, compared to Dentsu's Japanese billings of $11 billion.

On a worldwide basis, Dentsu had 1997 gross income of $1.99 billion and billings of $14 billion, while Leo Burnett had gross income of $878 million and billings of $6 billion.

Unlike the European advertising industry and, increasingly, the American, where the media buying and planning functions have been separated from the creative side, in Japan ad agencies continue to both create ads and buy space. Japanese clients are generally comfortable with different teams within the same ad agency handling their competitors' accounts, so the larger advertising agencies have become disproportionately large because there are fewer accounts for smaller agencies.

According to industry estimates, Dentsu books 31% of all TV commercials in Japan and 20% of newspaper ads.

Since the start of the Asian financial crisis and the onset of a weaker Yen, a number of Western agency networks have bought stakes in Jap-anese agencies. Within the world's second largest ad market, nine of the 10 largest agencies are Japanese. The only exception is seventh-ranked McCann-Erickson Japan.

In September, Omnicom Group agreed to buy another 20% stake in ninth-ranked Japanese ad agency I&S Corp. for $20 million with the intention of transferring the holding to BBDO Worldwide. Also in September, Omnicom-owned TBWA Worldwide announced plans to take an 81% stake for $250 million in mid-sized agency Nippo Inc. In August, Japan's fourth ranked agency, and long-time BBDO affiliate, Asatsu announced a merger with sixth-ranked Dai-Ichi Kikaku and said the WPP group will take a 23.4% stake in Asatsu for $208 million.

Dentsu, the world's largest privately-held advertising organization, has announced plans to offer some of its stock publicly to help fund the building of a new Tokyo headquarters. No date has been set for the stock market offering, but the flotation is likely to take place in 2001.

The proceeds of any sale of a minority stake in Burnett to Dentsu would be used to help fund Burnett's acquisition and diversification drive, according to Richard Fizdale, chairman-CEO of Leo Burnett.

"Importantly, Leo Burnett and Dentsu are not interested in merging. We are as committed as ever to maintaining separate and distinct agencies," Mr. Fizdale says. "Burnett is also committed to staying independent and private, with our attention squarely focused on clients."

The Leo Burnett organization is made up of 200 operating units in 75 countries, including 85 full-service ad agencies. Its major international brands include McDonald's, Coca-Cola, Walt Disney, Marlboro, Kellogg, Tampax and Nintendo.

Copyright December 1998, Crain Communications Inc.

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