Japan’s formidable trade barriers are crumbling. The latest proof: Omnicom Group announced last week that it intended to fold I&S, Japan’s eighth largest ad agency into BBDO’s global network. The deal represents a breakthrough, marking the first time a western company has bought an equity stake in a top-ten Japanese agency with the idea of running it directly, said Allen Rosenshine, chairman and CEO of BBDO Worldwide, who was part of an American delegation which traveled to Tokyo to explain the deal to I&S employees at the firm’s annual shareholder meeting.

The impending BBDO affiliation supplies the missing piece of the deal unveiled in January, when Omnicom first revealed it would acquire 20% of I&S, which had billings of US$787 million last year. But precisely how I&S would fit into the Omnicom universe - whether it would be a passive investment or actively managed - was then left unspecified.

Not anymore. In July, BBDO will begin to move its operations in Japan from third-ranked Asatsu, its partner since 1984 and considered Japan’s rising star, to I&S. Careful of Japanese sensitivities, BBDO avoided calling the deal a takeover.

"BBDO and I&S will form a BBDO agency as part of BBDO’s global network over time as we do everywhere in the world we operate," Rosenshine said. Joining the I&S board will be Rosenshine, Gerry Gentemann, president/creative director of BBDO Japan; Wick Smith, senior VP of information systems, BBDO worldwide, and Bruce Crawford, chairman of Omnicom.

At the same time, sources say, BBDO will eventually increase its stake in the agency from 20% to 40%. This could rise to 60% by next summer, and to 80% thereafter depending on the agency’s financial performance.

I&S was formerly owned by the. Yomiuri Shimbun/Nippon TV group of publishing and broadcasting companies, and Saison, a retail group, who owned 43.7% each. Minor shareholders include Hakuhodo, Japan’s No. 2 agency. It was Saison’s decision to sell in order both to raise funds and focus more closely on their core retailing business that gave Omnicom its opportunity.

The deal is another sign that Japan is being dragged into sync with the rest of the world. The country’s corporate culture views mergers and acquisitions negatively: they are widely seen as a last resort for companies which would otherwise face bankruptcy. Foreign takeovers were deemed especially abhorrent and were usually forestalled. And so the waves of M&A that have restructured advertising, in the USA and Europe passed Japan by.

But eight years of economic stagnation and recession have transformed the country’s cultural and fiscal landscape and forced business leaders to at least consider foreign offers.

Why did Omnicom bite? In part, Omnicom is playing catch-up. Interpublic Group of Cos., WPP, and Young &Rubicam, for example, all have stronger agencies in Japan. "We’ve been underrepresented in Asia, only 3 percent to 4 percent of our revenues have been coming from that area, including Japan," admits Fred Meyer, Omnicom CFO. "Being represented in Japan [which accounts for about half of advertising spending in Asia] will change that. I would not expect a large amount of acquisitions in that area; now it’s more to do with upgrading our operations there."

By most accounts Saison’s decision to gradually pull out of I&S took everyone by surprise, though it seems inevitable in retrospect. I&S wasn’t in any immediate trouble. True it had been steadily losing market share for over a decade, slipping from #5^th in 1986, but it was profitable - according to published financial reports - its major clients were loyal, and it turned out some good work.

And though the opportunity to buy equity in a major agency was unprecedented, at least one major agency and also one Western agency holding company turned the opportunity down in the 18 months that preceded this January’s announcement. Why? Over the years, I&S had earned a reputation as being a difficult partner for Western agencies who wanted to work in keeping with their own international standards. I&S had worked closely, in non-equity partnerships with Ogilvy & Mather, FCB, and Euro-RSCG each of whom ultimately decided it was better to go it alone than pursue a future in Japan linked with I&S.

The Omnicom deal initially means business as usual for BBDO clients. Only two will move from Asatsu immediately: Masterfood Japan [Mars] and Bayer. The others—Visa International, Wella Japan, International Wool Secretariat, Danone International and Iberia—will follow "when they are ready," Gentemann says hopefully. All told, about $95 million of business will move. As existing clients settle in at I&S, BBDO will be pitching clients aligned with the agency elsewhere in the world, but using other agencies in Japan. These include Volvo (currently with Dentsu Y&R), Chrysler (with Bozell Japan) and Federal Express (with Leo Burnett-Kyodo).

The long-term goal is to draw I&S into BBDO’s own ad culture. "We’ll gradually start to work with I&S on mutual assignments for other clients. We’re not in any hurry," says Gentemann. "We don’t have to change things overnight. We’ll be learning about them; they’ll be learning about us and how we do business." I&S staffers, however, are worried about present circumstances. In his first meeting with the I&S trade unionists, Gentemann was quick to reassure employees about job security.

He faces a more a more immediate challenge with I&S’ foreign clients. Among them is Guinness, a BBDO client in the U.K. but aligned with Ogilvy & Mather in Asia. In Hokkaido, through one of I&S’ nine regional offices, Gentemann is already working with Sapporo Breweries, the Guinness distributor in Japan. Regional capabilities are also expected to interest Masterfoods and Bayer, among other BBDO clients.

Retaining I&S’ Japanese client base is crucial for BBDO to succeed. I&S has assignments from two of Japan’s leading advertisers, Kao Corp. and Shiseido. Representatives from each company say that agency ownership is not an issue. They are pleased with I&S’ work and hope to stay that way. Shiseido adds that Bolty, a line of hair-styling products launched in March, are proving successful, thanks in part to advertising.

Yet despite the pluses the acquisition brings, it’s a difficult transition. Though the relationship with Asatsu had some difficult moments— notably when Omnicom sold the Asatsu equity BBDO bought in 1984, which cemented their original alliance, and on occasions when BBDO lost business—the parting is a sad one. Last year, the two discussed ways they could work together to nurture BBDO in Japan, but failed to devise a workable strategy.

Meyer explains, "If you date a girl for 10 years and want to get married and have children, and she says, ‘No, I don’t want to get married, I don’t want to have children with you,’ then though she may be beautiful, you have to switch. You cannot spend your life running after a dream that can’t be fulfilled."

Hence the switch to I&S, which gives Omnicom a substantial presence in Japan. In addition to BBDO and DDB Needham, five other units are already in place: Targis, a medical agency; Interbrand; two PR agencies, Fleischman-Hillard and Gavin Anderson, and Rapp Collins Worldwide, a direct marketing company. Omnicom’s new critical mass in Japan creates synergy. Gentemann expects to work alongside Rapp Collins on projects for Seibu department store.

The timing is key: TBWA now works with a subsidiary of Hakuhodo for Apple Japan. TBWA is trying to enter Japan via acquisition and is reputed to be in talks with two Nissan agencies, Standard Advertising and Nippo Ad. Nissan is also a TBWA client in Europe, where a Hakuhodo/TBWA joint venture, TBWA-NETH, handles Nissan’s corporate advertising.

Like Yomiuri, other media groups have agencies in tow. For example, the Asahi Shimbun newspaper owns 30 percent of Japan’s Asahi Agency and 24 percent of Daiko Advertising, ranked 5^th and 11^th respectively. Both shops have been losing share for over a decade and relay on the newspaper for most of their business. "We would like to see them improve their financial position to the point where they could attract foreign investment," says Masanori Nakashima, Asahi’s advertisement director. Sam Yoshida, a director of Recof, a Tokyo M&A boutique involved in the I&S transaction, adds, "the environment has changed for Japan’s ad agencies.

In fact, there are a number of agencies looking for fresh capital and management know-how, Yoshida says. "There are many potential sellers, mainly among agencies ranked from 11 to 30. As far as advertisers are concerned, there’s a greater willingness to support changes," he notes. "These are signs of the difficulty Japanese agencies face in achieving the global standards necessary for survival," says Leo Fujita, international business director for the Tokyu Agency. Clearly, Japan’s ad industry is changing. And, as Omnicom discovered, it is bringing opportunities that were unthinkable even five years ago.