Ad agencies’ tie-up a bold bet that size matters

Analysis: Publicis and Omnicom are billing the merger as ‘a powerful solution’ for clients

The merger between Publicis and Omnicom, which will create the world's largest advertising and marketing services group by revenues, is a bold bet that size matters in a new media world that increasingly is shaped by technology.

Gone are the Mad Men days of the advertising world, when creative shops such as Publicis's Leo Burnett developed campaigns for the Marlboro Man and Omnicom's BBDO launched the Pepsi Generation. Today's marketers are scrambling to connect with consumers amid the proliferation of media and mobile devices. A new crop of companies, ranging from internet groups such as Google and Amazon to newcomers such as Salesforce. com threaten to cut big advertising groups such as Publicis and Omnicom out of the equation.

They offer marketers revolutionary technologies to pitch their messages to customers in real time on television, the internet, mobile phones and digital billboards with analytical systems designed by actual rocket scientists.

"Lines have blurred completely, there are new competitors coming in every single day," believes John Wren, the chief executive of Omnicom who will become co-chief executive of the new entity. "The pace of change which is occurring today is going to get faster, not slower."

Publicis and Omnicom are billing the tie-up, which had combined revenues of $22.7 billion in 2012 and a combined market capitalisation of $35.1 billion, as a “powerful solution” for their clients that will create a “new standard” for the industry.

“Size will matter,” said Maurice Lévy, the chief executive of Publicis who will be the other joint chief executive of the new group. “What is true today is really not true tomorrow, and we have to be prepared for that.”

Wren (60) said that both groups have a history of striking ad buying and ad technology partnerships with new media giants such as Google and Amazon and that the merger will put the company in the position of creating more powerful solutions for clients. "None of us are going to be speaking about anything that isn't digital three to four years from now," he said.

Merger idea
Standing on the rooftop of Publicis's headquarters at the top of the Champs Elysées, and with a picture-postcard view of the Arc de Triomphe, Levy (71) explained how the idea of the merger began. "This started on this roof . . . the Arc de Triomphe and, he [Wren] said "this is priceless", and I made a joke. And we started to think."

The two executives described how those conversations gradually become more serious, leading to deal which stands as the advertising industry’s largest to date. The new company, which expects to generate “efficiencies” of about $500 million, will retain headquarters in both Paris and New York, and listings on Euronext Paris and the New York Stock Exchange, while using a Dutch holding company structure.

The board, with seven non-executive directors from each company, will be chaired initially by Bruce Crawford, Omnicom's chairman, with Élisabeth Badinter, Publicis chairman and daughter of the French group's founder, as non-executive chairwoman for the second year.

The two men confirmed plans to serve as co-chiefs for 30 months, after which Levy will step up to become chairman and Wren will become sole chief executive.

“Who is at the top we don’t care any more,” Levy said. “We want to put our fight into achieving fantastic success and achieving great leadership.”

The companies hope to close the deal by the end of this year or the beginning of 2014.

However, the deal is likely to face regulatory scrutiny. The CGT, the communist-backed French trade union federation, has called the proposed merger "a financial mega-operation rather than a relevant and complementary fusion". It demanded "intervention from the government and competition authorities to avoid monopolies in France and across the Atlantic".

Levy and Wren said that they are not expecting any red flags that would prevent the deal from going forward. Analysts, marketers and some competitors warned that the deal would have to overcome clients' concerns about conflicts of interest. After news of the talks first broke, David Jones, chief executive of competitor Havas, tweeted "oh wow just saw a flying pig".

Resolving conflicts
Omnicom agencies have long worked for PepsiCo, while Publicis agencies work for Coca-Cola, for instance. Omnicom and Publicis agencies also share several major clients, including McDonald's and Procter & Gamble.

However, ad holding companies have managed to resolve client conflicts through assigning competitors’ business to different agencies under their umbrella. Interpublic agencies, for instance, work with several competing automakers.

Levy and Wren said their top marketing clients wished the deal luck and they don’t expect such concerns to pose an issue. “Our industry already is well organised to deal with the issues of conflict,” Levy said.

Added Wren: “Do I expect to have difficulties? Yes. Do I expect to have resolutions? Absolutely.”– (Copyright The Financial Times Limited 2013)