WPP drops $4bn bid for Y&R

WPP, Britain's largest advertising group, has abandoned its $4bn (£2.5bn) bid for American rival Young & Rubicam with the US group now lining up a merger with French group Publicis instead.

However, it is understood that Y&R's talks with Publicis are not as well advanced as has been suggested. It is also possible that the terms of the French deal will be lower than the WPP offer. It is understood that Publicis may try to justify reduced terms by portraying its deal as a merger of equals. This would contrast with WPP's bid, which would have seen the British group control two-thirds of the equity in the enlarged company.

If Publicis does offer lower terms, it could prove a stumbling block with Y&R's top management team, which controls 30 per cent of the equity. The executives are currently locked in under the terms of a trust established to retain top staff when the company came to the stock market. But those ties cease to be binding on 16 May.

Analysts argue that a link-up between Y&R and Publicis would result in client conflicts. For example, Publicis looks after Renault, while Y&R's largest client is Ford.

WPP withdrew its offer late on Friday after a dramatic bust-up with its American target. The showdown centred on an "autonomy clause" inserted in the agreement by Y&R at the last minute. The clause insisted that Y&R's finance director, Mike Dolan, would have freedom to run the agency as an independent business within WPP for 12 months after the takeover.

If WPP tried to interfere within this time, it would have triggered "change of control" clauses that would have led to pay-outs worth about $60m to 50 top executives at the American group.

WPP was privately fuming over the clause at the weekend. It claims it was planning to set up an "integration committee" that would have been responsible for decisions involving Y&R after the WPP takeover. The committee would have included two representatives each from WPP & Y&R, with decisions requiring a majority vote. WPP claims this system would have meant that decisions could not have been taken without the American company's approval.

Sir Martin Sorrell, WPP's chief executive, has insisted all along that Y&R was not a "must have" deal. He is reluctant to overpay or launch a hostile bid for fear of repeating mistakes WPP made in the late 1980s boom when it bought Ogilvy & Mather.