The planned mega-merger between Omnicom Group Inc. and Publicis Groupe SA would reshape the industry landscape to create the world’s biggest advertising agency holding company.
When the deal was announced on the weekend, it was pitched as a way for the combined company to better compete in an age where digital media, big data, and a globally minded clientele have revolutionized the business.
But industry observers and insiders believe that another factor was the driving force behind the biggest deal the industry has ever seen: ego, and a succession plan.
“If big data, and the importance of that, was the story, they would have bought Nielsen,” said Rich Tullo, an analyst at Albert Fried & Co. in New York. “… The deal is very particular to these two companies.”
Paris-based Publicis chairman and chief executive officer Maurice Lévy, who is 71, has been wanting to retire. Handing the reins to New York-based Omnicom CEO John Wren – after a planned transition period wherein they would share custodianship of the newly merged company – would give him a clear path to do so. And on the way out the door, it would allow him to move from the No. 2 spot to No. 1, leapfrogging Sir Martin Sorrell’s WPP Group PLC.
That increase in size would bring benefits of cost savings and increased market capitalization, as well, along with the potential for better negotiating power for the media buying agencies under the combined company. The merger will require approval from both European and U.S. regulators.
The consolidation in the advertising industry – with more companies moving into networks owned by large holding companies – has been decades in the making, and is driven by a couple of factors: either a company needs better global reach to serve marketing clients looking to emerging markets, or it needs to buy a capability it has not developed for itself, such as in digital or in a niche area such as pharmaceutical advertising.
As companies look more to the parts of the world where the middle class is growing – markets such as South America and Asia, for example – some in the advertising world have turned to scale to show that they have the global capabilities to help those companies grow there.
“These big ad agencies service big clients, big multinational clients, for the most part. Yeah, they care about data, but they also care about the fact that there’s going to be a lot more growth of the middle class outside North America and Europe than inside, in the next five years, and companies will want agencies to help with that,” said Wedbush Securities analyst James Dix.
On a conference call to discuss the merger on Monday, Omnicom’s Mr. Wren trumpeted the strengthened presence in Latin America and Asia among other regions.
The birth of what will be Publicis Omnicom Group comes at a time when advertising itself is changing rapidly, with marketing dollars flowing more and more into digital and marketers struggling to understand how to take advantage of technology to better compete for the attention, and wallets, of consumers.
“This phenomenon has given rise to new media giants that have expanded the communication channels available to our clients,” Mr. Lévy said on a conference call Monday. “… That means our clients need even faster, efficient and global solutions, and they need a churnable insight in realtime from the vast amount of data that is now available.”
While there is no question that the merged entities will have more information at their fingertips about their combined client base, there is some debate as to whether getting bigger will have any impact, at least immediately, in those agencies’ ability to sift through that data and gain new insights.
“Data is important, but I don’t think it is the essence of this transaction. The essence is to rationalize the complementary needs of those organizations,” said Miles Nadal, CEO of advertising agency holding company MDC Partners Inc. “In terms of innovation, utilization of data, etc., all of those things are about entrepreneurship and innovation, and scale has historically been the bane of innovation and creativity. … What big data does, is the wildcard.”
The deal would bring together a massive portfolio of agencies under one parent company, including creative agencies such as BBDO, Leo Burnett, Saatchi & Saatchi, and TBWA; and media buying and planning agencies such as OMD, Starcom, and Zenith Optimedia, as well as PR and digital agencies.
As has been the case in other rounds of consolidation, for many of those agencies there will be little impact on the day-to-day as they continue to operate separately, and in some cases, even compete against each other when pitching to clients.
However, to seize more buying clout when it comes to paying for the media their clients need to broadcast advertisements, the new company may embrace a more co-operative model for its media-buying agencies, Pivotal Research Group analyst Brian Wieser suggested in a report on Monday.
Analysts are already speculating that more mergers are to come as other companies suddenly find themselves about to be dwarfed by a competitor with $23-billion in combined revenues when the deal closes (expected around year’s end).
Paul Lavoie, chairman of Canadian ad agency Taxi, which is part of the WPP network, also questioned the actual impact the deal would have on the advertising that is at the heart of the business.
“A large group can add value, if it co-operates … but there is a saturation of value at a certain size,” Mr. Lavoie said. “It’s a financial deal. It’s not about advertising, it’s about share value.”