Agencies: WPP in 'share-swap' deal with Japan's number three: WPP buys into top Japan agency.

WPP buys into top Japan agency.

David Kilburn looks at the logic behind the deal...

WPP Group and Japan's third largest agency Asatsu are forging a strategic alliance.

WPP is to take a dollars 208m (pounds 130m) stake in Asatsu - 20 per cent of its shares - and will give the Japanese agency an equivalent number of WPP shares in exchange, accounting for a four per cent stake in the company.

The alliance, subsumed in a holding company called WPP Japan Holdings, was announced just a week after Asatsu said it would merge with Dai Ichi Kikaku to create Japan's third largest agency, operating under the Asatsu name.

The WPP Group's strategic alliance with Japan's third-ranked Asatsu agency gives WPP Group chief executive Martin Sorrell an opportunity to build business with Japan's fastest growing agency - a company that has persistently challenged the status quo in Japan's moribund ad industry.

The two have yet to define which new ventures they will start together, but the first is likely to be MindShare Japan. This will enable Asatsu to add the latest media planning techniques to its buying power, while allowing the far smaller JWT and O&M agencies in Tokyo to take advantage of clout they could never achieve themselves.

At the same time there will be opportunities to develop relationships with a number of blue chip Japanese advertisers, both within Japan and elsewhere, while enjoying a 20 per cent share of the revenue streams Asatsu generates as it pumps up shareholder value.

It's no longer business as usual in Japan. Seven years of deepening recession have sapped advertiser confidence in the skills of many large Japanese agencies, and obliged some agency investors to cash in. And so Asatsu is also buying Japan's seventh largest agency, Dai Ichi Kikaku, much as Omnicom was earlier able to buy eighth-placed I&S Corp - both fading grandes dames.

The wisdom of WPP's deal is that it is based on partnership rather than any plans for acquisition and thereby enlists entrepreneurial forces at least as ambitious as those of Sorrell's. It is a sharp contrast to the "Omnivore's" more conventional approach. While Hakuhodo may be Japan's second largest in billings, it is now relegated to third place, behind Asatsu, in its ability to cope with Japan's harsh new realities.

Published in Marketing Week on August 6th 1998

Text of a joint announcement made by WPP plc and Asatsu - included here for the factual details it contains

WPP GROUP PLC ("WPP")

WPP to take 20% equity stake in Japan’s third largest advertising and communications company

Asatsu to take reciprocal equity stake in WPP

WPP has agreed to form a strategic alliance with Asatsu Inc. ("Asatsu"), Japan’s third largest advertising and communications company. This will include WPP taking a 20% equity interest in new Ordinary shares of Asatsu at a cost of JPY 29,980m (US$208m) and Asatsu taking an interest of equivalent value in new Ordinary shares of WPP which will represent about 4% of WPP’s enlarged equity. Asatsu and WPP will work together to provide global services to Japanese clients and advice to non-Japanese clients in Japan, which is the world’s second largest market accounting for over 10% of worldwide communications services expenditure.

This follows Asatsu’s announcement last week in Tokyo that it will merge with Dai Ichi Kikaku Co. ("DIK"), Japan’s seventh largest advertising and communications company. Following this merger, Asatsu will clearly be the third largest advertising and communications company in Japan and (based on the 1997 Advertising Age Agency Report) the 14^th largest worldwide.

In the year ending 31 December 1997, on a Japanese GAAP basis, Asatsu reported billings of JPY 225,075m (US$1,565m), gross margin of JPY 30,735m (US$214m) and profits before tax of JPY5,248m (US$36.5m). On the same basis in the year ending March 31, 1998, DIK reported billings of JPY 131,248m (US$912m), gross margin of JPY 17,195m (US$120m) and profits before tax of JPY1,918m (US$13.3m). Asatsu had net assets with a book value of JPY72,154m (US$502m) at December 31, 1997 and DIK had net assets with a book value of JPY17,134m (US$119m) at March 31, 1998.

Following the merger, on the same basis, the enlarged business will have combined billings of JPY 356,323m (US$2,477m), gross margin of JPY47,930m (US$334m), and profit before tax of JPY 7,166m (US$49.8m).

The enlarged business will also have very significant cash and financial resources. The combined net assets of Asatsu and DIK at the dates noted above included cash and investments with a current market value of approximately JPY66bn (US$460m), in comparison to an anticipated market capitalisation (following the rise in the Asatsu share price after last week’s announcement) of approximately JPY150bn (US$1.0bn). Asatsu intends to use these liquid assets and its strong operating performance relative to its key competitors to enhance shareholder value. In line with this strategy, Asatsu has recently amended its articles of incorporation to allow this cash to be used to buy back shares.

WPP Group had billings of US$27.8bn (according to the 1997 Advertising Age Agency Report), revenues of US$2.9bn and pre-tax profits of approximately US$300m in 1997. Group companies offer clients communications services including advertising, media planning, buying & research, information & consultancy, public relations & public affairs, sales promotion, direct marketing, identity & design and other specialist communications. WPP operates in over 800 offices in over 90 countries with over 25,000 people.

Asatsu, founded in 1956, listed on the Tokyo Stock Exchange in 1987. Since its initial public offering, Asatsu’s revenues have nearly trebled growing at a rate more than double that of the Japanese market as a whole. Asatsu currently operates from 9 offices in Japan and in 19 offices outside Japan with over 1,200 employees and has consistently been the most profitable advertising and communications company in Japan

DIK, founded in 1951 went public in 1996. DIK operates from seven offices in Japan and in 11 offices outside Japan with nearly 800 employees and is the third most profitable advertising and communications company in Japan.

WPP will purchase an initial 23.5% equity stake in Asatsu at a cost of JPY29,980m (US$208m) and Asatsu will make a reciprocal investment of the same value in new WPP Ordinary shares. Following the completion of Asatsu’s merger with DIK and the issue of new shares to the existing DIK shareholders, WPP will hold 20% of the equity of the enlarged company.

In addition, Asatsu and WPP plan to establish a new holding company, WPP Japan Holdings, to develop opportunities within the Japanese market and with Japanese multinationals including the areas of media planning, buying and research. Clients of Asatsu and DIK include many leading Japanese and multinational corporations and both Asatsu and DIK work for a number of current WPP clients in the Japanese market, including AIG, Bandai, IBM, Nikon, Unilever and Warner Lambert. This structure will combine Asatsu’s strength in Japan with WPP’s global network and capabilities. Japanese multinationals make up a significant portion of global advertising and marketing spending.

Mr. Masao Inagaki, Chairman and Chief Executive Officer of Asatsu will become the Chairman of WPP Japan Holdings and will join the board of WPP as a non-executive director. Mr. Martin Sorrell, Chief Executive Officer of WPP will join the board of Asatsu in a similar capacity.

WPP member companies include advertising agencies Ogilvy & Mather Worldwide and J. Walter Thompson Company, global media planning, buying and research operation MindShare, information & consultancy networks Research International and Millward Brown International, and public relations & public affairs companies Hill and Knowlton and Ogilvy Public Relations Worldwide. Clients include more than 300 of the Fortune Global 500.

WPP’s current interests in Japan include J Walter Thompson Company, Ogilvy & Mather Worldwide, JMRB-Research International and Hill and Knowlton.

This alliance continues WPP’s strategy of strengthening its position in key geographic markets and follows recent investments in France and Australia – which along with Japan are the three markets the Group had identified as being priorities. WPP now ranks in the top five in all the top twenty markets worldwide.

For further information, please contact:

WPP Group plc
Feona McEwan (contact in London)
Tel: (0171) 408 2204

Asatsu Inc.
Koichiro Naganuma (in Tokyo)
Tel: (81) 3 3547 2517