Holding companies merge to create $35.1-billion giant

Many in the ad industry will return to work Monday morning in a radically different world than the one they left Friday afternoon.

New York’s Omnicom Group and Paris-based Publicis Groupe SA rocked the industry this weekend with a seismic “merger of equals” that creates the world’s largest marketing communications company, with combined annual revenues of US$22.7 billion, a market capitalization of $35.1 billion and more than 130,000 employees worldwide.

The merger brings together some of the most storied names in advertising — including TBWA, BBDO, DDB, Saatchi & Saatchi and Leo Burnett — in a new entity to be called Publicis Omnicom Group.

Omnicom CEO John Wren and his Publicis counterpart Maurice Lévy will serve as co-CEOs of the new merged entity for the first 30 months, after which Lévy becomes non-executive chairman and Wren continues as CEO. The company will have a single-tier board with 16 members, consisting of the two co-CEOs and seven non-executive directors from each company.

Reaction to the merger was swift, with many industry observers stunned by both its scale and complexity.

MDC Partners CEO Miles Nadal called it a “holy s–t” moment for the global marketing communications advertising industry, while experts said it will lead to a further wave of consolidation as rivals like London-based WPP Group — which would lose its title as the world’s biggest marketing services company should the deal be completed — look to grow in response.

Brian Wieser, a senior research analyst with Pivotal Research Group in New York, called it the biggest media deal of the past 20 years, rivaled only by the AOL/Time Warner merger.

That assessment came just two days after Pivotal had termed a potential deal “unlikely” because of a variety of factors: U.S. anti-trust issues; the degree of control Omnicom would have over a company Pivotal described as one of France’s most important multi-national firms; and being counter both to Omnicom’s traditional history of taking a “disciplined and cautious” approach to growth and Publicis’ stated focus on digital and emerging markets.

“I’m a bit surprised, as culturally the two holding companies appear quite different,” agreed Arthur Fleischmann, partner/president of Toronto agency John St., which itself was snapped up by WPP Group last year. “We’ll see how they share leadership and align to a new vision. Industry growth is limited by ongoing global economic flatlining — this is one way to create grander scale, drive down operating costs and possibly complement one another’s worldwide footprint.”

Although a combined firm will allow for more pricing power in general, the decrease in competition could present regulatory hurdles in the U.S. and Europe. Client conflicts also could be an issue, as rivals such as Coca-Cola Co., PepsiCo, McDonald’s, Yum Brands’ Taco Bell, Johnson & Johnson and Procter & Gamble now find themselves under the same umbrella.

“This is an interesting,” said Dominic Proctor, global president of WPP’s GroupM, in a statement released early Sunday evening.

“They are making it clear that a primary motive for the merger is achieving scale in media buying. However, 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.”

Wieser predicted that the merger would lead to a “profound change” in the media industry, with implications for everything from the evolution of media negotiations to ad tech and the shifting competitive dynamic with the likes of Accenture and IBM as they begin their own forays into marketing services.

“It’s hard to not talk about this without being hyperbolic,” said Wieser, who said that the sheer size of the deal means it’s still unclear what kind of reverberations it will send through the industry.

“Some of the conclusions that we’ll all eventually come to are only going to come with time, because this is so far from being considered plausible by most people that it’s not as if the consequences have been thought through,” he said. “Anyone who’s followed the agency business knows it’s a product of mergers and acquisitions, and most of us certainly expected another round of consolidation, we just didn’t expect it would be this kind of consolidation.”

Reached in Toronto on Sunday, Nadal called the merger “a really terrific idea” for the two companies, noting that they possess complementary competencies and deficiencies.

At the same time, Nadal said it represented an “incredible opportunity” for MDC, which operates agencies including Crispin Porter + Bogusky, Anomaly, 72andSunny and KSP+. “Rarely in the history of our industry has consolidation led to more innovative work and better work that drove better performance,” he said. “Clients will move towards more stable organizations that are smaller, more nimble and really have a dedicated mission to do brilliant work.”

Nadal said that the move would be particularly advantageous for MDC in attracting clients in its “sweet spot,” those in the $10-25 million range, because of the combination of client conflicts and a lack of focus. “[The holding companies] will be completely, myopically devoted to the consolidation for the next two years,” he said. “We’ll just have a lot less competition.”

The merger also runs counter to the prevailing trend towards digital in advertising, he said. “Digital is not about scale, digital is about innovation,” said Nadal. “The most innovative digital technologies and campaigns have always been done by smaller, more entrepreneurial firms.”

Association of Canadian Advertisers (ACA) CEO Ron Lund predicted that conflicts would be one of the biggest concerns for his members — many of Canada’s marketers and advertisers. “I don’t know what the rationale would be to say why this would be good for any advertiser, especially ones that are in conflict,” said Lund. “They were presumably happy with their individual agency, and now they [have] a conflict foisted on them.”

Lund said that even the promise of additional negotiating power with vendors is compromised by the fact that the buying groups have already ground vendors down significantly.

“Our belief for some time now is that all the agencies are pretty gigantic once you get to that scale, and we think that everybody buys pretty well,” said Lund. “They’ve all got the clout they need, so what we talk to our members about is how do you ensure that you’re getting the best deal within that agency. It’s not one price fits all, so you’ve got work out where you fit in the pecking order. This is just going to compound that.”

But Media Experts founder and CEO Mark Sherman said that holding companies have already created the necessary firewalls to deal with client conflicts and that it won’t be as big an issue as predicted.

“It’s not like PHD and OMD and Starcom MediaVest are going to become one firm and suddenly there’s going to be a bunch of conflicts,” he said. “The multi-banner strategy has been in place for a long time in order to deal with conflicts, so that comes with the merger.

“There might be a few advertisers who protest, but where are they going to go? If they try to go over to WPP they’re going to find there’s another bank or another auto company there,” he added. “Conflicts are quite largely overblown, so I don’t really see that there’s going to be a shakeout of accounts.”

Sherman did predict, however, that the merger would benefit independent agencies and lead to the creation of a wave of new boutique shops as the merger takes its inevitable toll on staff.

“It’s stifling for talent of all types to work in these kind of mega-merger environments where they’re just numbers, where the quarterly numbers are all-important and where there’s going to be a tremendous amount of pressure to rationalize the investment,” said Sherman. “That’s going to be stifling for talent throughout the agency, and I personally think that’s great.”

Photo: Canadian Press