What the Publicis-Omnicom Merger Means for WPP

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Omnicom Group (NYSE: OMC) and Publicis Group (NASDAQOTH: PUBGY.PK) announced a merger in late July. This new partnership completely changes the global marketing communications landscape. 

WPP PLC (NASDAQ: WPPGY) is now the second-largest advertising company in the world. It is now facing a heap of challenges competing in the years ahead. If any company is ready to take on the new giant, however, it is WPP.

WPP's foundation provides a solid base

WPP is well connected with international companies. With the growing trend towards global marketing, the firm is set to earn substantial profits. These long-established relationships with clients means that it will be difficult for the new Publicis-Omnicom Group to steal clients away from WPP. This creates a solid foundation with which to grow. It means that the new super-giant merger won't likely threaten the relationships the company already has with its current clients.

With the average relationship with each of the top 10 clients being 50 years, WPP is known for keeping its clients happy. The company has a safeguard in case any conflicts arise in any of those relationships: multiple networks. For example, if the firm's Ogilvy & Mather agency were to lose a client, Young & Rubicam could pick that client up. This keeps clients in the WPP umbrella of companies, allowing profits from the clients to stay in the firm's books.

What analysts think

Analysts could see the Publicis-Omnicom merger as harming WPP's profits. While this year's earnings per share is expected to increase 7%, it is pegged to drop 33% next year. The projection could be due to an anticipated inability to adjust to an increasingly digital advertising climate, as well as the likelihood that the merger will result in a new company that is better able to keep up with shifts in the technology. I believe that WPP's client base that requires traditional advertising will sustain the company until it is able to develop a large online profile, however.

India is a key factor

WPP's market share in India will determine if it can survive the merger without much of a detrimental effect. WPP still controls the rapidly-growing nation, with about $2.2 billion of its $10.3 billion in revenue for last year coming from India. In comparison, about $1.1 billion of Publicis-Omnicom Group's $21.6 billion in revenue last year was from India. Given WPP's strong relationship with its clients, Publicis-Omnicom will be hard-pressed to gain a larger portion of that market share.

The merger allows Publicis-Omnicom to better compete

Omnicom President and CEO John Wren said that the new company is better able to compete with the new major online advertisers. That segment is stealing a large portion of the revenue. The merger gives the new company the combined resources of Publicis and Omnicom, and also gives it a massive amount of cash flow with which to adjust to the changing advertising landscape. About $500 million in savings each year is expected from the merger. That money could be dedicated to research and development, putting the company in a position to develop advertising that can compete with Google and Facebook. The firm is now worth $22.7 billion, which is over $6 billion more than WPP.

WPP will manage the adjustment period

The merger gives Publicis-Omnicom a strategic advantage due to its ability to save on operating costs. This is money that the new firm will likely use to position itself better to compete against online rivals, as online advertising is where a large portion of global advertising revenue is generated. WPP has a strong hold on India, however, and this growing market segment keeps the company well-positioned for future profits. As long as WPP is able to adjust to the shifting advertising landscape, I don't see the merger as having much of a detrimental affect on business.

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