On Sunday 28 July, an incredulous industry buzzed with shock as news of a proposed merger between Publicis Groupe and Omnicom Group made headlines. If the deal goes through, the new entity, Publicis Omnicom Group, will have a combined 2012 revenue of US$22.7 billion and a market capitalisation of about US$35 billion, based on 26 July prices.
The transaction is the biggest in the advertising world, leading many to question whether it will put pressure on rivals to be more acquisitive in order to compete with the scale created by this new giant ad player. This applies especially to WPP, which now sits in second place behind the combined group with registered revenues of nearly $17 billion.
At a press conference in Paris, Publicis chief executive Maurice Levy described the group as “a new company for a new world”. His counterpart at Omnicom, John Wren, said it would reshape the industry “by setting a new standard for supporting clients with integrated messaging across marketing disciplines and geographies”.
Yet, based on R3’s figures, Publicis-Omnicom still trails in third place in Asia-Pacific with revenues of $2.6 billion. Dentsu-Aegis with $4.8 billion in revenue leads, followed by WPP in second place with $2.7 billion (WPP’s figures are $3 billion). And in the all-important China market, WPP is far ahead with revenues of around $1 billion says R3 (WPP reports $1.5 billion), versus the combined group’s $730 million, thanks in part to Kantar, which has more than 3,000 employees in China.
The move has led to industry speculation about WPP making a bid to regain leadership by striking deals with Interpublic (IPG) or Havas. Analysts added to the speculation, pointing to the potential for Dentsu-Aegis to increase its footprint in the United States by acquiring IPG.
But in an internal memo to staff, IPG’s Michael Roth played down the reports, pointing to the previous mega-mergers that have swept industries, adding that such deals don’t often live up to the reality. But he did not rule out the need for IPG to link up with another agency in order to remain competitive, noting that “as this weekend’s surprising news shows, there’s no telling what might take place”.
Dentsu, which a year ago agreed to take over Aegis Group for $4.9 billion, said the Publicis-Omni-com merger will likely intensify competition and give impetus to more mergers and acquisitions in the industry in Asia’s growth markets.
So is this really a ‘merger of equals’?
Wren and Levy will lead the company as co-CEOs for 30 months, after which the latter will transition to the role of non-executive chairman while Wren currently continues as CEO of the merged entity.
In the first year following the transaction, Bruce Crawford, currently Omnicom chairman, will be the non-executive chairman of Publicis Omnicom Group. He will be succeeded by the current Publicis Groupe chairperson, Elisabeth Badinter, as non-executive chairperson for the second year following the closing of the transaction. The merger will not involve layoffs.
While both companies will continue to maintain their respective operational head offices in New York and Paris, the holding company will be headquartered in The Netherlands.
Will anyone get rich? The transaction has been structured so that the shareholders of Publicis Groupe and Omnicom, after special dividends, will each hold approximately 50 per cent of the equity of Publicis Omnicom Group. Publicis Groupe shareholders will receive one newly issued ordinary share of Publicis Omnicom Group for each Publicis Groupe share they own, together with a special dividend of €1.00 (US$1.33) per share. Omnicom shareholders will receive 0.813 newly issued ordinary shares of Publicis Omnicom Group for each Omnicom share they own, together with a special dividend of $2.00 per share. In addition, Omnicom shareholders will receive up to two regular quarterly dividends of $0.40 per share if declared and the record date occurs prior to closing.
In the statement issued jointly by both companies, the deal is expected to close in the fourth-quarter of 2013 or the first quarter of 2014. The reaction from investors was muted. By close of trading on the first day following the announcement, shares in Publicis were up by just 0.25 per cent at €59.50, while Omnicom shares closed 0.55 per cent lower at $64.75.
Tech giants and the regulatory minefield
The exponential growth of new media giants such as Google and Facebook and the explosion of big data leading to competition from tech giants such as IBM, Salesforce.com and Oracle was a main reason given by Levy for the deal. Senior industry members and analysts, however, have greeted this with scepticism, with the general consensus being that the main reason for the merger is Levy’s desire to leave behind the world’s largest advertising group as his legacy.
But by positioning the merger as one that plays in the same space as the tech giants, Publicis and Omnicom are able to mitigate anti-trust issues in the US, notes senior research analyst at Pivotal Research Group Brian Wieser. In total, the new group will have to clear antitrust regulations in 45 markets. “Agency holding companies can argue they account for a modest share of buying from some of the world’s largest media companies, such as Google and Facebook,” says Wieser.
This positioning seems likely to succeed as Google, which declined to comment when approached, is currently facing an antitrust probe by the US Federal Trade Commission into whether the company is illegally curbing competition through the strength of its ad display business.
If Publicis-Omnicom fails to make this case, it might prove to be “one deal too many” for the Trade Comission, Allen Grunes, an antitrust lawyer with GeyerGorey in Washington, told Bloomberg. “Ad agencies have consolidated like crazy over the past 10 to 15 years. There has to be a point at which that is going to be stopped,” he said.
UK advertising body ISBA has already voiced concerns about the new group’s potential for market dominance and restriction of choice for advertisers.
Culture clash and cost-cutting
Will French Publicis and American Omnicom make good bedfellows? The culture test will be key. The role of the holding company is to preserve the culture of its agency brands. After all, that’s what makes them successful.
“The speed of integration and realisation of revenues rely heavily on the two organisations understanding each other’s culture,” observes Ake Ayawongs, region M&A leader for Asia, Middle East & Africa at Mercer. According to research by Mercer, only 25 per cent of respondents from global organisations were addressing culture in their transactions in a planned manner. “That is a good reflection of just why some of the recent transactions have not been able to result in desired shareholder value.”
In the case of Publicis-Omnicom, former head of Publicis Worldwide Richard Pinder, co-founder and CEO of The House International, believes that the clash won’t be one of culture but of economics. The two groups expect $500 million in operational savings, and it has to come from somewhere, writes Pinder on the Stuart Smith Blog.
“Publicis Groupe runs lean. Margins are already industry best… It will be interesting to see how the board of BBDO reacts to the likely loss of their top-tier international travel rights, or the agencies of DDB cope with tough bonus rules that tie every unit in the company to the performance of those around them, as happens at Leo Burnett or Publicis today.”
Client conflict not an issue
While much has been made of the potential conflict between Leo Burnett client Coca-Cola and Omnicom client Pepsi, most industry experts don’t regard client conflicts as real issues as both groups are skilled at managing rival clients within their networks. “Conflict is dead as long as the firewalls are up,” commented a regional media group head.
A larger issue for clients in general will be less choice. “For clients who want global networks, their choices have been reduced to two or three groups,” says Darren Woolly, managing director of TrinityP3.
It is also unclear what benefit the merger presents to its clients. “The focus of their communication seems to indicate a priority of delivering value to shareholders,” says Nick Waters, CEO of Aegis Media Asia-Pacific, adding that a larger structure may prove to be a stumbling block. “As clients and agencies need to respond ever more quickly to consumers, internal bureaucracy becomes an obstacle.”
WPP CEO Sir Martin Sorrell compared the merger to the 1986 Saatchi & Saatchi acquisiton of Ted Bates, which led to the departure of legacy Bates clients RJR Nabisco and Warner Lambert. Furthermore, when there is a change in control, some clients are obligated to review accounts for governance reasons, he told Campaign Asia-Pacific.
Some clients appear to be looking on the bright side. Omnicom client Roel de Vries, Nissan’s global head of marketing, brand strategy and communications, greeted the merger as good news. “It’s really about having increased access to talent and expertise,” he says.
But expect rival agency networks to be on the alert. “When the merger happens, management will get distracted by internal issues and clients begin to wonder, ‘What’s in it for me?’” says Ogilvy & Mather Asia-Pacific CEO, Paul Heath. “That’s when we expect some opportunities.”
When merged, the group will have a combined media-buying clout of around $110 billion, ahead of WPP’s $95 billion, according to R3.
Nevertheless, GroupM Worldwide president Dominic Proctor does not seem too worried. “Neither Omnicom nor Publicis was able to bring their investment teams together effectively as individual companies, so it will be fun to see if they can now do it together,” he says.
Scale alone doesn’t necessarily lead to negotiating clout, says Wieser, pointing to Magna Global, which IPG formed in 2001. “IPG’s media agencies then had the largest share of the market for media buying at around 25 per cent of the industry… [but] ‘clout’ did not come to fruition as originally intended, as Magna did not have control over its affiliated agencies.”
To be a ‘second GroupM’ that negotiates volume deals first and then fits media inventory to its client plans, the media agencies under Publicis-Omnicom will have to work together as closely, says Wieser. Currently, OMG agencies are understood to negotiate media buys separately and ZenithOptimedia and StarcomMediaVest Groups don’t typically work together, he adds.
“The focus and rationale appears to be in the area of trading consolidation,” agrees GroupM Asia-Pacific CEO and China chairman Mark Patterson. “It will be interesting to see how long it takes and to what extent this can be achieved. We have had a consolidated approach for six years now and achieved significant success for our clients in that period.”
The potential presence of two GroupM-like operators in Asia-Pacific will likely place large media owners such as Google and large broadcasters under pressure, says Tim Pinnegar, MD at The Economist. “It probably means better value, better discounts and payment terms,” he says, but adds: “Value doesn’t necessarily just mean price”.
In the long-run however, Wieser expects media owners to have weakened negotiating positions if the new entity bulk-buys media. “While the impact would not play out for many years, long-term media cost inflation would likely be at least partially contained,” he says.
The merger will give the industry a much stronger position with the media, one that favours procurement practices, agrees a regional agency lead. “[For media owners] it creates an aggregation of power and that can of course alter the balance of things.”
One major result of this deal may be a move for the groups to acquire media owners. “When you have that much mass, you can acquire and own actual media itself,” Woolley says. “Dentsu has been doing this in Japan since it started — creating an end-to-end media solution.”
OPINION Retaining talent will be top priority
by Greg Paull, principal, R3
The merger begs the question: will big advertisers have just two choices in the future for media buying? What top advertiser would entrust their investments to someone as small as Interpublic or Havas?
The US will prove interesting from an anti-trust perspective, since the combined revenue of the two firms, following Publicis’ digital acquisitions, is around US$11 billion, just over double the next largest.
There’s also been a lot of talk on potential conflicts such as Coca-Cola and Pepsi. Coca-Cola has always had an unwritten rule never to work with an Omnicom agency, given Pepsi’s alliance. We don’t see these as major issues. It’s more of a challenge when individual agency brands merge. It’s really not such a big issue for holding companies.
GroupM in Asia-Pacific already works with Unilever, P&G, L’Oréal, Colgate and SC Johnson across multiple sub-agencies. We don’t anticipate any massive client fallouts.
The challenge for marketers will be how to see the synergies for their business. The group has announced its target of $500 million in savings for its own business. Will this mean cutting corners as it relates to clients? Both groups were already very efficiently run. The priority for the group will be keeping talent. Thought you were a major player in an agency or holding group? That one just got bigger. Wren and Levy also did a lot of this in secrecy, and this may upset some senior powerbrokers at both groups.