Ed Meyer Scores a $1.4 Billion Deal

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NEW YORK (AdAge.com) -- WPP Group won the battle for Grey Global Group, agreeing to pay $1,005 a share or $1.4 billion, about half cash and half stock, for Madison Avenue's last remaining major independent.

WPP this morning said it had won the auction but declined to reveal price or details until an official announcement Sept. 13. Individuals close to the situation disclosed the price, which marks a record

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high for Grey stock and a premium over Grey's $940 a share closing price last week.

Grey declined to comment.

World rankings
The deal won't change world rankings of ad firms. WPP, the No. 2 ad holding company with 2003 revenue of $6.7 billion, adds Grey, No. 7 with revenue of $1.3 billion, but the resulting $8 billion company will remain in second place in revenue behind Omnicom Group.

WPP, the acquisitive British advertising giant, prevailed over private-equity firm Hellman & Friedman and French ad firm Havas, which offered bids of $900 or more. The rivals' final bids weren't immediately clear.

Grey's four-member board met at 9:30 a.m. in New York Sept. 11 to weigh offers and gave the news to WPP around 2 p.m. that day. WPP's finance director, Paul Richardson, signed the contract Saturday evening. Completion of the deal is expected in late fourth quarter or early in the first quarter.

The sale price is more than 100 times Grey's 1965 initial public offering price of $9.75.

Separate network
WPP will operate Grey as a separate network, alongside WPP's existing networks, which include Ogilvy & Mather Worldwide, J. Walter Thompson Co. and Young & Rubicam. Ed Meyer, 77, Grey's chairman-CEO and controlling shareholder, will continue to run Grey for a period of two years. WPP has offered Mr. Meyer a seat on its board.

WPP's decision to leave Mr. Meyer in charge may have helped its hand. Hellman, seen as WPP's key rival going into the board vote, appeared set on replacing Mr. Meyer as CEO with industry veteran Michael Dolan while likely offering Mr. Meyer some other opportunity, such as Grey chairman. The day before Grey's board vote, one close observer said Hellman's intent to install its own CEO could be a deal breaker because of Mr. Meyer's desire not to lose his powerful position.

Photo: Pat Denton
Ed Meyer, chairman-CEO and the major stockholder of Grey Global Group, stands to get about $286 million for his Grey shares, or $336 million including stock options.
Mr. Meyer joined Grey in 1956 as an account supervisor and took the top post in 1971.

Controls 70% of stock
Mr. Meyer owns more than 20% of Grey, but he controls 70% of voting stock through his shares plus trusts and stock plans he oversees. While Grey has three other board members, Mr. Meyer controlled Grey's fate. A Securities and Exchange Commission filing in March noted he can "exercise significant influence over our business and affairs. This includes any determination with respect to mergers or other business combinations."

Mr. Meyer stands to get about $286 million for his Grey shares, or $336 million including stock options. Grey's other 500-plus shareholders will get the rest.

Grey's chief also has a lucrative golden parachute waiting if he leaves before the end of his contract, which Mr. Meyer in May amended and extended a year -- to Dec. 31, 2005 -- weeks before Grey hired bankers to shop the company. Under his parachute, Mr. Meyer would have received "special severance" of $33 million if he'd left the company last December after a change in control, according to an SEC filing.

In cashing in, Mr. Meyer joins the company of Donny Deutsch and Bob Jacoby, both of whom reaped mega jackpots upon selling agencies they led. Mr. Deutsch pocketed $213 million in 2000 after Interpublic Group of Cos. bought the shop started by his father; Mr. Jacoby's take was $110 million when Saatchi & Saatchi purchased Ted Bates Worldwide in 1986.

Geographic mix
The acquisition doesn't significantly alter WPP's geographic mix. WPP last year generated 42% of revenue from North America, 41% from Europe and 17% from Asia, Latin America and other regions. Adding in Grey, WPP gets 42.4% of revenue from North America, 41.6% from Europe and 16% from other areas.

But Grey gives WPP a big prize: Grey's top client is Procter & Gamble Co., which has been with Grey for more than 40 years and accounted for 10.6% of Grey's 2003 revenue. P&G is the world's top advertiser and is No. 2 in U.S.

WPP Group CEO Martin Sorrell must now protect Grey's clients from poaching rivals.
ad spending, according to Advertising Age tallies.

WPP's chief executive, Martin Sorrell, now must show he can manage a potential conflict: P&G vs. rival Unilever, which has worked with WPP's JWT for more than a century. If Mr. Sorrell can manage these two rivals, it could help holding companies make the case that conflicts don't matter -- and open a battle for clients.

A client battle actually starts Monday morning, as Grey and WPP rivals begin trying to pick off Grey advertisers. Publicis Groupe, a major P&G ad network that pulled out of the Grey auction in July, is poised to go after more P&G work if Mr. Sorrell drops the ball. Publicis' chairman-CEO, Maurice Levy, said in July: "I think we can gain more business from P&G without buying an agency."

WPP vs. Hellman
Grey's auction in the end appears to have come down to WPP vs. Hellman, with Havas the third but weakest bidder. WPP and Hellman were well-acquainted; the San Francisco private-equity firm helped take Y&R public in 1998 and then sold Y&R to WPP in 2000, and Chairman Warren Hellman served on WPP's board till last year. Mr. Hellman several months ago approached Mr. Sorrell about making a joint bid for Grey. Mr. Sorrell -- correctly, as it turns out -- decided he didn't need a partner to make a play for Grey. Hellman today had no comment.

Havas last week became the first bidder to disclose publicly that it was making an offer. Havas Chairman-CEO Alain de Pouzilhac saw this as the chance to catapult Havas into the league of giant ad firms. The combination of No. 6 Havas and No. 7 Grey made sense strategically. It didn't make sense financially; Havas' heavy debt load and the stresses from a recent reorganization put it at a disadvantage.

Havas entered a bid despite objections of Vincent Bollore, a French corporate raider who this summer took a stake of at least 8% in Havas. Mr. Bollore considered the bid too risky. Now Mr. de Pouzilhac faces another risk: that Mr. Bollore will push for management change at Havas. With Grey's sale and given Havas' weak stock price, Havas itself could become a takeover target.

In the Grey acquisition, WPP will pay about 1.07 times Grey revenue, well below prices on other recent agency deals. Interpublic paid 1.4 times revenue for True North Communications in 2001 -- pursuing True North after Grey rejected overtures from Interpublic. Publicis paid 1.6 times revenue for Bcom3 Group. WPP paid 2.4 times revenue for Y&R in 2000, near the peak of the ad and stock markets.

Weak financial performance
But Grey will be a bargain only if WPP can fix Grey's weak financial performance. Grey's operating margin -- operating profit as share of revenue -- has been below 8% for the past 10 years and was just 5.7% last year, less than half that of WPP, Omnicom Group and Publicis.

Grey's big cost problem: labor, agencies' biggest expense. Grey last year spent about 66 cents of each revenue dollar on salaries and related costs compared with less than 60 cents for rivals WPP, Publicis and Interpublic.

A more fundamental issue: Grey has operated like a private company, focused on clients but with little mandate from the top to maximize the bottom line or match the financial metrics of rivals.

Grey, for decades Mr. Meyer's private club, now will be owned by one of the shrewdest and most demanding financial operators in the business, Mr. Sorrell. The two CEOs' corporate cultures and management styles couldn't be more different. How this deal works out -- particularly, as long as Mr. Meyer stays at Grey -- will be one of Madison Avenue's more intriguing post-merger stories.

Selling the prize
Mr. Meyer for years turned down suitors as the global ad agency business consolidated into a handful of giants. This year, he finally decided to sell his prize, hiring Goldman Sachs and J.P. Morgan Chase & Co. to look for a buyer. Grey shares traded at $850 a share the day before the first media reports June 25 that Grey was up for sale. Grey had no comment at the time, but Grey July 20 confirmed it had hired bankers to review alternatives.

The company was until 2000 known as Grey Advertising, although Mr. Meyer, responding to the changing market, in the '80s began to acquire or start companies in disciplines outside traditional agencies such as health-care advertising, public relations and direct marketing.

In the 2000 restructuring, Grey Advertising established a holding company, Grey Global Group. The advertising division took the name Grey Worldwide; its other units include media buying and planning unit MediaCom; medical advertising unit Grey Healthcare; direct agency Grey Direct, public relations shop GCI Worldwide; G2, branding and identity shop, and Grey Interactive, an interactive unit.

Color of its walls
Grey was started in 1917 with $100 by an 18-year-old named Lawrence Valenstein, who named the agency for the color of its walls. Ad insiders have long joked the agency was named for the color of its ads -- Grey's reputation has been built on strong client service, not market-leading creative. It has proved to be a successful strategy, for Grey has held on to its top 10 clients for more than 23 years on average. Grey's ads -- with slogans such as "Choosy mothers choose Jif" and concepts such as the Kool Aid Man -- have sold a lot of product. That's what Grey advertising is all about.

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