Mega merger could spark industry revolution

September 2013 | FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

In recent years big money mergers and divestitures have become part of the fabric of the advertising sector. However, the majority of the industry was caught off guard when, in July, US firm Omnicom Group Inc and French company Publicis Groupe SA jointly announced they had signed a definitive merger agreement valued at approximately $35.1bn. By combining, the two firms stand to create an advertising superpower, with a client list including global giants Coca Cola Company, PepsiCo Inc, Google Inc and Apple Inc.

The agreement, which has been unanimously approved by the boards of directors of both companies, is expected to close in either the final quarter of 2013 or the first quarter of 2014. In order for the deal to be completed the two firms must first seek regulatory approval in 41 to 46 different markets. Arguably, the most crucial of these markets will be the US where the new group will control around 40 percent of all advertising spending.

John Wren, chief executive officer of Omnicom, has dismissed any fears of a regulatory challenge and is confident that the deal will get the go ahead from the relevant antitrust authorities. Mr Wren noted that “nobody has raised the red flag” over the deal.

Mr Wren and Maurice Lévy, chief executive and chairman of Publicis, will serve as co-chief executive officers of the new firm for the first 30 months, after which time Mr Lévy will serve as non-executive chairman. Mr Wren will continue as the sole chief executive officer of Publicis Omnicom.

Publicis Omnicom Group, as the new firm will be known, will have dual headquarters in Paris and New York, where the company will also continue to trade. However, for reasons of neutrality the company will be registered under a holding company in the Netherlands.

There are a number of positives to be taken from this deal for the two firms, not least of which will be the substantial synergies which they claim are possible. Omnicom and Publicis, in their joint statement, noted that they expect to generate synergies of around $500m. Furthermore, the companies do not anticipate any redundancies for their combined 130,000 employees. They also estimate the new firm would have generated revenues of $22.7bn in 2012.

Consolidation

The merger of Omnicom and Publicis, the number two and three ranked firms in the industry respectively, could have a significant impact on the wider state of the advertising market. Not only will the two firms create a new super agency, they may also spark a new wave of consolidation across the sector.

A record breaking merger of the magnitude and value of the Publicis Omnicom deal is always likely to have repercussions for the rest of the industry. However, for some time before the so-called ‘marriage of equals’ came to light, there were longstanding rumours that Publicis would acquire the fourth largest ad-holding company in the industry: Interpublic Group of Companies Inc. Informal talks between the two parties are believed to have been ongoing for a number of years. Yet, with Publicis’ merger with Omnicom announced, a deal for Interpublic is now off the table.

Interpublic will be, and already is, dwarfed by its competitors, yet still appears to be a viable target for firms looking to generate growth. Shares in Interpublic rose 5 percent in trading on the New York Stock Exchange following the announcement of the Publicis Omnicom merger. WPP would seem a sensible choice as a potential acquirer of Interpublic.

Speaking about the Publicis Omnicom deal Sir Martin Sorrell, WPP’s chief executive and chairman, said “This is a seismic shock to the industry and will make clients and people think about what they’re doing. This gives us a big opportunity.” Whether WPP will choose to pursue acquisitions remains to be seen. Sir Martin has played down the need for his firm to respond, noting that WPP is still the leading agency in key European and Asian markets. Besides, it is possible that WPP could choose to further expand its operations in data services and consumer insight by targeting market research companies such as Nielsen, GfK or Ipsos.

The world’s fifth largest advertising agency, Japanese firm Dentsu, which recently acquired media buying firm Aegis Group PLC for around $5bn, is still in the market for acquisitions. Furthermore, Havas SA, a mid-sized French advertising agency, is also known to be seeking growth.

Although it is clear that the advertising landscape will be greatly affected by the merger of Omnicom and Publicis, the scale of the impending transformation is not yet clear. However, it is entirely possible that the Publicis Omnicom deal could open the proverbial floodgates for other firms to begin to pursue acquisitions.

Conflicts

Despite the obvious advantages for both companies, any union of A-list advertising agencies such as Omnicom and Publicis will inevitably lead to complications. Although the chief executives of both firms have been at pains to point out the harmonious nature of their relationship so far, there is no guarantee that this will continue indefinitely.

Already some analysts have begun to liken the Publicis Omnicom marriage to the ill-fated and ultimately unsuccessful merger of Saatchi & Saatchi and Ted Bates in 1987. The Saatchi/Bates merger also created the world’s then largest advertising agency, but after more than a decade of infighting and losses the firms underwent a messy divorce.

It is only natural that any merger combining firms the size of Omnicom and Publicis – with their respective portfolios of sub brands, employees and clients – will result in culture clashes. The duality of the new firm’s Franco-US identity may also lead to issues further down the line. The sharing of the chief executive role, coupled with dual headquarters, could also prove to be problematic.

From a client perspective, there are a number of factors to consider.

The new company will command the largest media-buying budget within the advertising community, which will allow the firm to buy advertising space across all mediums at more favourable rates. Clearly, that will be of great benefit to clients.

When considering the prospect for conflict, both companies already had significant experience establishing strict firewalls to protect their client’s interests, according to Mr Levy. Now, more than ever, clients will have to rely on that experience as Publicis Omnicom establishes and maintains new internal procedures and firewalls to protect particular brands.

Although it is too early to tell at the time of writing if the merger will lead to an exodus of disgruntled clients to other firms, if Publicis Omnicom fails to protect the interests of their blue chip clients, it is entirely possible that some of them may seek new pastures. WPP and others would therefore be ideally placed to take advantage. For clients of a monolith like Publicis Omnicom, a smaller agency alternative may prove attractive; and signing up clients from Publicis Omnicom would represent a great opportunity for smaller firms to generate growth.

However, Mr Wren and Mr Lévy claim to have contacted their major clients to assuage any conflict fears, and to have received predominantly positive responses. Indeed, according to Publicis Omnicom, many clients seem unconcerned by the merger, citing their satisfaction at the new agency’s structure of holding companies and firewalls. “If you look at the industry it has changed quite dramatically in the last 15 years and all the holding companies as they are today already handle a lot of conflict,” said Mr Levy. “If you look at any of our competitors, as small as it can be, you will see that they are handling conflicts because this is the story of our life.”

Big Data

Another of the potentially revolutionary features of the merger is the new company’s shift towards Big Data. The merger is indicative of Madison Avenue’s response to the rise of Silicon Valley. The advertising industry has to face up to the fact that the landscape is changing. With the arrival of new media giants such as Google, Facebook and Twitter, there has been a surge in Big Data. Moreover, there have been significant changes in consumer behaviour.

Although television is still the primary recipient of advertising spend in the US, garnering around $66bn this year, online adverts are quickly gaining ground. Online ad spend is currently worth around $43bn, and with technology companies easily able to access the data of millions of users to target them with advertisements, it is easy to see why Big Data is becoming so crucial to advertisers. In many instances, technology and social media giants are simply bypassing ad agencies altogether and interacting directly with clients to target their adverts at users. Against this backdrop, Google’s revenue hit $50bn in 2012, largely on the strength of the company’s advertising business.

The merger of Omnicom and Publicis can therefore be seen as a direct response to the expanding advertising power of Google and others, rather than as a play to usurp WPP. According to Mr Wren, Omnicom has already been “ramping up data analytics. Collecting big data and being able to turn it into insights is the ambition of both companies, and it will be the ambition of the single company”.

Whether the new company can counter the rise of the Silicon Valley giants remains to be seen. However, while Google and other tech companies have access to vast swathes of Big Data, the larger advertising agencies have a greater wealth of industry knowledge overall. Publicis Omnicom, WPP and others know what works and what doesn’t, and crucially at what price. At this stage the ad agencies can arguably provide their clients with better metrics, better account of dollars spent in converting sales, and better ad buying strategies that can help to improve conversions.

The merger ofOmnicom and Publicis caught the advertising world off guard. Analysts, clients and the vast majority of staff knew nothing of the impending tie up. However, once the initial shock subsides, the merger should create a formidable advertising and marketing platform for the digital age – one that will aim to provide company shareholders with enhanced returns. Investors in each company will receive a special dividend and the deal is structured to give each company’s owners half of the new firm.

Despite these positives the deal will now come under the close inspection of myriad antitrust regulators who will take some persuading to permit the merger to go ahead. But if the tie-up is approved, Publicis Omnicom’s competitors – both old and new – will need to reassess their competitive position against the industry giant.

Richard Summerfield