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NEWS29 April 2008

Industry reacts as GfK and TNS reveal merger talks

‘Merger of equals' deal would create second largest agency • Reactions from analysts and agencies

GERMANY/UK-- Research giants GfK and TNS have confirmed that they are in talks to merge.

The proposed “merger of equals” would see the two firms become the world's second largest agency, under the name GfK-TNS. Shareholders in each of the two firms would hold 50% of shares in the merged group.

News of the potential merger had an immediate impact on both companies' share prices, with increases of 18.8% for TNS and 6.36% for GfK.

The announcement of the potential merger came in a joint statement this morning, in response to press speculation. The firms said that "a merged GfK and TNS would be positioned to capitalise on global opportunities in the market information industry with specific expertise in the consumer, technology, media and healthcare sectors."

The combination would broaden the range of services on offer, strengthen syndicated business, and extend coverage in the fast-growing markets of Asia, Latin America and Eastern Europe, they said.

TNS chief executive David Lowden said: “The market has long since seen these two companies as ideal partners and now is the right time to bring them together.” Klaus Wübbenhorst, CEO of GfK, said the combination would create a “global leader in our industry”.

In the merged firm, the chairmen of GfK and TNS – Hajo Riesenbeck and Donald Brydon – would become co-chairmen, with Brydon planning to step down after two years. Lowden would serve as chief executive, with Wübbenhorst as non-executive director. The firm would take TNS' London headquarters, with GfK's global headquarters in Nuremberg becoming the German head office.

The two firms stressed that the deal is still under discussion and would be subject to regulatory approval.

Research spoke to industry leaders and financial analysts to garner reaction

The response from financial analysts has been varied, but many agreed that the news could entice other companies to bid for TNS.

Numis Securities' Dominic Bush speculated on the possibility of other bids. “The prospect of a nil premium merger puts TNS in play and we believe trade buyers and possibly private equity could be interested,” he said, naming WPP, owner of the Kantar Group, as a potential suitor.

Alex de Groote of Panmure Gordon said the lack of cash in the nil premium share-for-share merger would disappoint some investors, but that the news could “flush out” other interested parties, boosting TNS' share price in the short term. He added: “There is a defensive aspect to this combination and it could imply a deteriorating near-term revenue outlook for both companies.”

Steve Liechti of Investec Securities said: “It has always been a dream deal within the sector. There are a lot of synergies between the two.” Liechti said both WPP and ACNielsen might be tempted to make a move for TNS.

Many of the research chiefs Research spoke to felt the challenge of integrating the two businesses was a tough one. Ipsos' European CEO Brian Gosschalk said the news was not surprising in the current climate. “The industry looked set for further consolidation – the question was which companies and when,” he said. Gosschalk recalled difficulties surrounding the mergers of TNS with NFO and GfK with NOP, saying the combination would require “an awful lot of skilful handling to make it a success”.

George Terhanian, president of European operations and global internet research at Harris Interactive agreed that it won't be an easy job. He said: “It's incredibly complicated to put together two companies, especially in geographies where they both have a sizeable presence. Good luck to them.”

Terhanian also expressed doubt about the potential benefits, saying: “Time will tell, but I just really struggle to see how this will make the combined companies stronger than the individual ones. From our point of view, rather than having two good companies that we compete against, we'll have one, and I'm not sure it's going to be better.”

Richard Gilmore, managing partner at Cello, echoed Terhanian's concerns, saying: “I can't see in whose interest it is. Obviously it makes them bigger, and I dare say there will be some centres geographically where they can overlap and synergise, but I think a lot of clients will be thinking it restricts their choice.”

Don Elgie, CEO of Creston, was more positive about the challenges ahead for the two firms. He said: “I think they're just about perfect partners and they've come up with an elegant solution.” Elgie added that despite problems when assimilating NFO, TNS has “a good record on acquisitions and bags of experience”.

Another senior industry figure questioned the wisdom of combining two Euro-centric firms, saying: “I'm not sure it makes a huge amount of sense – their business will be mostly in Europe, which is the slowest market. Both of these businesses have struggled a lot in the US.”

Authors: Robert Bain and James Verrinder

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