A Mega-Merger That Benefits Competitors the Most

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Omnicom Group (NYSE: OMC) and Publicis Groupe SA (NASDAQOTH: PUBGY) surprised the markets on Sunday, July 28 by announcing their merger. The combined company will replace WPP Group (NASDAQ: WPPGY) as the world’s biggest advertising holding monster. The new firm will have revenues of about $23 billion and a market cap of $35 billion.

The newly formed company Publicis Omnicom Group will bring popular ad firms like Omnicom’s TBDA Worldwide, BBDO Worldwide, DDB Worldwide and Publicis’ Leo Burnett and Saatchi & Saatchi under one roof. The merged company will have about 130,000 employees worldwide. It will be listed under the ticker symbol “OMC” on Euronext Paris and the New York Stock Exchange. Publicis CEO Maurice Levy and Omnicom CEO John Wren said in a joint statement that the deal is expected to close by the end of the fourth quarter.

Since 2008, WPP has been the world’s largest advertising agency with the purchase of Taylor Nelson Sofres Plc. Martin Sorrell has made more than 200 acquisitions to reach the top spot, which has now been snatched by Publicis. WPP posted a revenue of $17 billion in 2012.

Of course, there are cost synergies

The merger is expected to generate about $500 million in annual cost synergies through staff reduction and back room consolidation. It will give the new company more firepower and scale to negotiate better rates while securing media for its clients. The merger will strengthen their presence in emerging markets like Brazil and China where both firms have been boosting their operations to offset poor growth in Europe.

Over the past few years, Publicis has shifted its strategy towards digital marketing by acquiring Razorfish, Lbi, Rosetta and Digitas. The French company aims to generate 75% of its revenue from digital operations by 2018, according to Forbes. It will benefit Omnicom because the New York-based firm has focused mainly on building internal web capabilities and working with tech giants. They complement each other well in the digital space.

Integration hurdles

The advertising industry is well known for mergers and acquisitions. But a deal of this size could raise antitrust issues in France as well as in the U.S. because it will reduce competition. Bert Foer of the American Antitrust Institute says that the merged company would have enormous power in the market, which is against antitrust laws.

Both companies have said that John Wren and Maurice Levy will be the co-CEOs of Publicis Omnicom Group for the first 30 months. Though the two executives may be comfortable with this management structure, the position of CEO is all about power. Let’s see how they balance it. Even if they successfully manage it, mid-level executives will have more difficulties in day-to-day operations. That’s because both the holding companies comprise of several independent ad firms. Now they have to further fit into a broader, more complex and more bureaucratic structure.

Another concern is that it’s the merger of equals, and the two companies are based in different countries. One is headquartered in New York and another in Paris. How much power will be given to which office? Moreover, increase in size of a company reduces efficiency. That’s because the firm’s focus turns to internal management from client business.

Client conflicts to benefit rivals

I see a potential of conflict in the merger as there will be competing accounts. For example, PepsiCo is a major client of Omnicom while Coca-Cola comes under the roof of Publicis. Omnicom has AT&T and Publicis has Verizon. Omnicom sees the advertising of Microsoft while Publicis has Google in its client list.

I don’t think a company would pay an agency that also works for its competitor. So, the rivals of Omnicom and Publicis are gearing up to attract the blue chip clients of the merging firms that might leave Publicis Omnicom Group due to potential conflict of interest.

WPP chief Martin Sorrell is ready to grab a large chunk of the business arising from major clients leaving Publicis Omnicom Group. Calvert Investment Management analyst Steve Sorrano estimates that billions of dollars worth of business is up for grabs. More importantly, advertisers usually include clauses in their agreement with agencies that allow them to renegotiate the deal if the agency is bought or sold.

Final words

Consolidation is taking place aggressively in the advertising world. I think this merger would prove more beneficial to the competitors of Publicis Omnicom Group like WPP and Interpublic Group. WPP chief Martin Sorrell has indicated in the past that Interpublic Group could also be an acquisition target. Let’s see if Sorrell makes an offer to regain the top spot. Anyway, investing in WPP and Interpublic Group seems more reasonable.

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Vikas Shukla has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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