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Recent financial and management restructurings at True North Communications and Young & Rubicam have led some industry executives to wonder whether a merger of the two would make sense.

There's no indication the companies are talking about such a scenario, which they both dismissed as pure speculation. But an analysis of the underlying reasons for their respective restructurings makes a merger look interesting for both sides, while at the same time raising questions about plausibility.

Privately held Y&R ranked No. 6 among the world's largest ad organizations in 1995, reporting $1.2 billion in revenue on billings of $9.9 billion. Besides Y&R Advertising, it owns global agencies including Wunderman Cato Johnson, specializing in direct marketing and sales promotion, and Burson-Marsteller in public relations.


True North ranked No. 13 last year, with $439 million in revenue on billings of $6.3 billion. Nearly 40% of its profit came from the 20% stake it holds in Paris-based Publicis Communication. It reaps more than half its revenue from ad agency Foote, Cone & Belding.

For True North, a merger would fix a problem Chairman-CEO Bruce Mason has been trying to solve for several years by giving it a second global network. Most other publicly traded holding companies own between two and four global networks, making it easier to avoid client conflicts.

True North spent much of 1994 and 1995 pursuing an acquisition of Bozell, Jacobs, Kenyon & Eckhardt, a privately held holding company that's growing overseas but still gets three-quarters of its revenue from the U.S. Talks were called off late last year.

A second network also would make True North less reliant on Publicis, with which it has been struggling to renew an expired worldwide strategic alliance.

For Y&R, a second advertising network would give it more flexibility for managing conflicts and, perhaps more important, would serve as a source of new business for auxiliary units like Wunderman, Burson and identity shop Landor Associates.

"Specialty units owned by Omnicom and Interpublic have an advantage over ours," said a Y&R executive, "because they have three or four agency networks bringing them business. A second network would really help us in that regard."

Both companies could stand some financial improvement. At 3.4% and 6%, respectively, True North and Y&R had '95 pretax profit margins below other holding companies. Interpublic Group of Cos. was at 11.7%, Omnicom Group at 10.7%, and WPP Group at 7.3%.


A merger, moreover, could help the two companies cut central overhead expenses. Those gobbled up about $30 million of Y&R's '94 revenue of $950 million, according to Y&R documents shared with investment bankers last year.

As for client conflicts, there are surprisingly few. FCB's U.S. car client, Mazda Motor Corp., is 33% owned by Ford Motor Co., Y&R's auto client. And both agencies work for AT&T Corp. and Cadbury Schweppes.

But there is one big one: Y&R's Colgate-Palmolive account and True North's S.C. Johnson & Son business. After Colgate consolidated its $550 million worldwide account at Y&R in December '95, a move that shifted close to $200 million in billings out of FCB, S.C. Johnson consolidated its $350 million global account at FCB.


The biggest questions a merger would have to answer involve strategy and affordability.

With its stock price depressed by investor concerns about Publicis, True North's current market value is about $400 million, less than half the $1 billion Y&R would probably ask if it were for sale. So even though True North has little debt on its balance sheet, Y&R would appear the more likely buyer.

But its recent sale of a minority stake for about $200 million to San Francisco buyout firm Hellman & Friedman raises questions about its ability to pay for True North.

First, Y&R turned to Hellman, in part because it didn't want to take on any more debt. At the end of '94, Y&R had some $260 million in long-term debt on its books, much of it borrowed to buy out retiring employee shareholders.

Second, though Y&R's partnership with Hellman gives it a new source of capital, Hellman expects an aggressive return on its investment, giving many observers, including Y&R insiders, reason to expect Y&R to attempt an initial public offering within the next three years.

Analysts said buying True North first could make a Y&R IPO more attractive to investors.


Rival agency executives note that Y&R's high debt levels will keep its book value from increasing much in the next three to five years, when key executives including the 57-year-old Chairman-CEO, Peter Georgescu, are likely to retire.

Going public may offer those executives their only route to getting the true value of their shares out upon retirement.

One analyst said a merger wouldn't make strategic sense for True North.

"I just see them going in a different direction. They're teed up to go forward with their own agenda," said Rita Spitz, an analyst with William Blair & Co., Chicago.

On the top of that agenda: a big push into interactive marketing, via its TN Technologies unit. True North hopes to take that unit public later this year.

As for Y&R, Ms. Spitz suggests the time to consider a merger would have been before the recent recapitalization and sale of shares to Hellman.

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