Omnicom Emerges as the World’s Largest Advertising Firm

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As the competition between businesses becomes more and more fierce every day, advertising agencies will be able to derive quite a lot of benefit from this trend. The companies are increasingly opting for advertising their products to reach their targeted audience. It is one of the best ways for companies to highlight the unique features of their products. These changing trends clearly show the bright prospects that big, well-known advertising companies have. Recently, Omnicom (NYSE: OMC) has entered into a merger agreement with Publicis.

Synergies derived from this merger

With the companies sharing one vision, this merger is expected to create the world’s biggest company in communications, advertising, marketing and digital services. The combined revenues in the year 2012 were $22.7 billion, which is a lot higher than WPP's (NASDAQ: WPPGY) revenue of $16 billion, a key competitor of the company.

The combination was strategically very compelling, as together these two companies will be in a remarkable position to cater to their clients’ rapidly changing requirements with their extensive portfolio and charge a better price for their enhanced service level. The group will include well known agency brand names i.e. BBDO, Saatchi & Saatchi, DDB, Leo etc. Customers will benefit from powerful solutions and a better quality comprehensive service offering, helping them establish their brand names and grow their businesses in the constantly changing market.

The new company looks forward to spending on new technologies to accelerate innovation and leverage upon the new scale in the digital world of big data, analytics, new story-telling and e-commerce and m-commerce.

This merger will also increase the geographical presence of the combined company in growing Asian and Latin American markets such as China and Brazil, where both companies have sped up their operations to offset the low growth experienced in weak European markets. The company will also benefit from cross selling opportunities. This will create broader opportunities and significantly enhance the revenue streams.

Value creation for shareholders

This merger will prove to be in the best interests of shareholders due to the monetary synergies that are expected to materialize resulting from this deal. The company as a whole is expected to produce synergies of $500 million. This will add accretive value of $1.23 per share, based on the 407 million shares issued by the new company, Publicis Omnicom Groupe.

Also, the superior EBITDA and operating margins of Publicis will enhance the combined companies margin level. In 2012, Omnicom reported its EBITDA margin at 14.7% and operating margin at 12.7% while Publicis’s EBITDA margin stood at 18% and operating margin at 15.4%.

The combined company’s dividend payout ratio will also be increased to 35% of earnings as compared to 25% for Publicis and 33% for Omnicom. The shareholders of both companies will benefit from this new policy. Omnicon’s shareholders are also expected to receive a $2.80 per share special dividend, while Publicis’ shareholders will get €1 per share immediately.

The net debt position of the new company is also very low, with net debt/ EBITDA LTM reported to be 0.9 times as of June.

Whose next in the game?

With the largest market capitalization of $35 billion of Publicis Omnicom Groupe, WPP is next inline with market capitalization of nearly $22.5 billion.

The company’s wholly-owned global digital agency, VML, acquired a majority stake in NATIVE, a leading South African digital marketing agency. The motive behind VML's acquisition was to enhance its global presence and fortify its capabilities in the digital media segment. Currently, digital revenue represents 33% of the total revenue generated, while WPP aims to increase this percentage to nearly 40% in the upcoming five years.

NATIVE offers a full range of services including creative, design, technology execution, marketing analytics, digital media buying and social media management. Its client base includes L'Oreal, Nedbank, Nestlé and Standard Bank.

The Interpublic Group of Companies (NYSE: IPG) is a smaller player in the advertising industry, with a market capitalization of $6.5 billion.

The group’s global leading public relations agency, Weber Shandwick, has opened its first offices in Turkey and Kuwait to service multinational clients in these high growth markets and increase its international presence. The two countries offer a huge earning potential and many untapped opportunities.

Weber Shandwick has also recently launched GoLive, a creative service offering that incorporates live story-telling, broadcast quality production and social distribution.

Conclusion

The recent merger has created a very strong company with deeper coverage across fast growing geographies and is expected to be very beneficial altogether for its clients and shareholders. Hence, I would recommend buying this stock to reap a healthy return.

With the demand of digital marketing on the rise, WPP is heading in the right direction towards increasing its proportion of sales derived from this segment. The company has a bright future and is likely to offer a good return to its shareholders.

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Awais Iqbal 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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