The fall of an empire: a look at the Publicis-Omnicom non-merger

The ad world was in a bit of tizz last year when it was announced that the world’s second and third largest holding companies, Publicis Groupe and Omnicom, would merge to create the world’s biggest holding company and knock WPP off its perch. When we spoke to DDB NZ and Australia chair Marty O’Halloran at the time, he said the US$35 billion mega merger (the companies had combined revenue of around US$23 billion in 2012​) was unlikely to impact too heavily on this market. And it definitely won’t impact on this market now, because the lovers called the massive deal off late last week. Here’s a rundown of what the two parties and the international media are saying. 

The Omnicom statement put the cancellation down to “difficulties in completing the transaction within a reasonable timeframe”, with both companies alluding to tax holdups in the U.K. and France and regulatory delays from China’s antitrust authorities in their first quarter earnings call (Publicis sent out a press release in April titled Precision outlining some of the nuts and bolts—and the issues it was trying to resolve).

In a joint statement, Lévy and Wren said: “The challenges that still remained to be overcome, in addition to the slow pace of progress, created a level of uncertainty detrimental to the interests of both groups and their employees, clients and shareholders. We have thus jointly decided to proceed along our independent paths. We, of course, remain competitors, but maintain a great respect for one another.” 

In addition to the regulatory delays, the Wall St Journal said, “the deal billed as a ‘merger of equals’ had been challenged by battles over position and power”. 

It was a complex deal from the start. The companies had made clear it was to be a merger of equals, where the shareholders would each receive about 50% of the equity in the new company—Publicis Omnicom Group—and where the two CEOs would share the top job for 30 months from the closing.

At the same time, the merger entailed a combination of a French and an American company, with the new firm incorporated in the Netherlands and a U.K. company for tax purposes. Yet the operational headquarters would be split between France and the U.S.

And technically one company has to acquire the other, for accounting reasons. The two sides hadn’t agreed on which company would be the acquirer of the other, which held up filing of crucial paperwork with the U.S. Securities and Exchange Commission, said people familiar with the situation.

The New York Times said

After much persuasion, Publicis was prepared to allow Omnicom to be the acquirer, according to people briefed on the matter. But Publicis then balked at the notion that Omnicom’s management would retain control of both the chief executive and chief financial officer roles. Omnicom was pressing to have its finance chief, Randall J. Weisenburger, keep his role.

That would have made the deal essentially an Omnicom acquisition of Publicis. In addition, Publicis executives contended that their company had the stronger financial model and was better positioned to integrate the merged corporation’s finances.

The Wall St Journal said this was “one of the largest announced deals to later be called off” and reported Wren saying: “We thought we would be through this in six months and nine months later we still have a lot of complex time-consuming issues that because of different corporate cultures we haven’t been able to resolve. There was no finish line in sight and that created uncertainty.”

Adweek’s cover story is on ‘Le Divorce’ and the headline subtitle says: “As [John] Wren and [Maurice] Lévy lick their wounds, the only winners are the lawyers”, claiming the nine month courting process racked up nearly $100 million in professional fees. 

During the process each side revealed a weakness in praising the other’s strength: for Omnicom, it was Publicis’ digital resources and for Publicis, Omnicom’s creative assets. Officially, the complexities in attaining U.K. tax domicile and regulatory approvals, and subsequent transaction closing delays, are blamed for the deal’s collapse. But insiders insist the lack of consensus about management structure and top personnel decisions are the real reason, something even Omnicom’s Wren hints at.

“The corporate [and]cultural differences are not easily resolved,” Wren told Adweek. “It’s better to call it off now than get married and have regrets.”

It’s thought the deal was aimed at better competing with the likes of Google, Facebook and other leaner digital companies that are able to gather data and better target ads to consumers. But many wondered about the reasons for the merger and whether it would benefit clients, including WPP’s Sir Martin Sorrell, who has been very vocal about the deal from the start and said it was a case of “eyes bigger than tummy”: 

“This [merger]was born out of emotion and ego to knock WPP off its perch, given our lead in areas like fast-growth markets, digital and data. Maurice’s well-known Gallic charm seduced John with ‘All this could be yours,’ but Maurice wouldn’t give up power after the announcement. It all added up to a soap opera.”

In an internal memo obtained by Ad Age, he said: 

The latest volte-face reflected the putative deal’s lack of strategic logic for clients and people, a clunky structure, regulatory and tax issues and escalating problems with clients and people – the latter despite continual protestations to the contrary. Recent POG client defections to WPP alone in April, included Vodafone, M&S, Comparethemarket.com, Pepsi China, Papa John’s, E*Trade and Miller Lite. 

And he also warned WPP employees to ‘stay on guard’ because both parties will be wounded and on the hunt for staff and clients. 

Forbes said ‘big is not a strategy‘ and believed the deal collapsed because “there was nothing in it for the clients”. 

The advertising industry has been dominated by a strategy of consolidation and scale for 30 years, while becoming less creative, less innovative and less effective than it used to be. The ad conglomerates and the big legacy agencies like Ogilvy or Y&R bury their heads in the sand and ignore the new realities. In the world today, where Instagram runs 200 million users with 45 employees, the rules of the game have been changed by fast moving digital realities. WPP has 175,000 employees and a market cap of $29 billion. Google has 47,000 employees and a market cap of $353 billion.

Scale is not as relevant as it once was.

Ad Age pointed out the awkward timing of John Wren’s award for ‘services to the industry’ and said there was little communication between agencies or clients about the merger being called off. 

News of the merger’s failure seemed to come as a surprise even to some of the most senior agency leaders, both at Publicis- and Omnicom-shops. One senior executive at a large agency said the news came to the shop from Twitter.

Another senior executive at smaller holding-company owned agency said that no one at his shop knew, and speculated that only executives at the holding-company level had been notified before news hit.

Senior Omnicom agency executives are convening Friday morning to discuss the fallout, according to a person familiar with the matter.

Some the holding companies’ largest clients were caught off guard by the announcement, too, with one senior executive saying there had been no communication from either Publicis or Omnicom.

So what now? The share price of both companies fluctuated on the news, but Wren said in a statement that the deal collapse won’t impact it greatly:

“I want to emphasize that while the proposed merger was time-consuming, we never took our eye off the ball in terms of what we needed to deliver for our clients, our people and our shareholders. And that has been reflected in our reported results. We’re bullish on 2014.”

Both parties released each other from all obligations, which means no termination fees are payable by either party (a $500 million termination fee would have applied if either company had walked away unilaterally). In a separate statement, Publicis said it would continue with its own previously outlined growth plan.

“This merger was always one of opportunity, not necessity,” Lévy said. “The decision to discontinue the process was neither pleasant nor an easy one to make, but it was a necessary one.”

But despite this news, many are predicting more consolidation ahead, with The New York Times quoting Pivotal Research’s Brian Wieser​ saying “Publicis could make a hostile bid for Omnicom or go after another big player like the Interpublic Group. Dentsu, a large Japanese advertising firm, might also seek some kind of deal.” 

“We’ve essentially tossed the salad up in the air,” he said.

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