The razzle-dazzle world of marketing communications never saw a more unlikely union as the one between arch rivals Omnicom Group Inc., the $14.2-billion New York-based marketing communications company and Publicis Groupe SA, the $ 8.4-billion advertising and public relations company based out of Paris. As the two exchange marriage vows and regulators across 46 countries mull over the sub-text of this merger, this could turn out to be a marriage of great inconvenience for UK-based WPP Plc., led by Martin Sorrell. WPP, till a few days back, had the distinction of being the largest marketing communications company in the world. Now it no longer has this distinction, and has been unceremoniously relegated to second place in global rankings.
For the record, Omnicom and Publicis towards the end of last month announced a definitive agreement for a merger of equals, creating the world?s largest company in communications, and advertising, marketing and digital services, with combined 2012 revenue of $22.7 billion. Publicis Omnicom Group will have a combined equity market capitalisation of approximately $35.1 billion.
In a press statement, Maurice Levy, chairman and chief executive of Publicis Groupe said, ?The communication and marketing landscape has undergone dramatic changes in recent years including the exponential development of new media giants, the explosion of data, blurring of the roles of all players and profound changes in consumer behaviour. This evolution has created both great challenges and tremendous opportu- nities for clients.? Levy added that the two groups had conceived of this merger to bring together a comprehensive offering of analog and digital services.? It will offer talented people new avenues for growth and success at the crossroads of strategic intelligence, creativity, science and technology,? he explained. John Wren, the chief executive of Omnicom, stated that the combination will help them leverage the skills of their people, their product offering, enhanced global footprint, and roster of global and local clients. ?In short, we believe this is a merger that will set our new company on a path to accelerated growth, with long-term benefits for clients, employees and shareholders,? he said.
Merger of equals?
Julian Boulding, president of UK-based The Network One, a company that represents a network of independent agencies, said that the merger brings to his mind what creative genius David Ogilvy had said? pigs do fly. ?Omnicom is actually worth 1.75 times Publicis. So how did Publicis swing this one? That?s because Publicis?s share price has risen 42% more than Omnicom?s since early 2010, because they have made a lot of acquisitions. Presumably they have counted these in their revenue, to achieve revenue growth, which is what stock market analysts and other transaction-hungry parasites of the financial system rate most highly,? he says. ?Omnicom shareholders will want to look very carefully at how many of these acquisitions are fully paid (with no future incentive payment liability). And even if they are ? they will have to judge whether these risky and unproven acquisitions, sometimes worth hundreds of millions of dollars, mostly in the digital sector which is famed for crash and burn businesses, will continue to generate revenue at the rate projected by the new owners,? he added.
Boulding says that a bet on Publicis by Omnicom is actually a bet on France which is a brave call to make. ?Anyone with any knowledge of the global advertising business knows that ?national champions? prefer to award their business to agencies from their own country. American agency groups? expansion into new markets has always been driven by loyal American clients. So a bet on Publicis is a bet on France which is rather a brave call these days? not to mention the fact that on almost any measure, France is less than 20% the size of the US,? he said.
If the 2012 global revenues of Publicis and Omnicom are added, it surpasses the $16.4-billion revenue for WPP. In terms of profit too, the combined entity would boast of a $1.95-billion bottom line compared to $1.3 billion for WPP. The merged entity also has better net profit margins of 8.57% compared to 7.93% for WPP in 2012. Among the advertising groups globally, Publicis Groupe exhibits the fastest growth rate for sales; its revenues grew at about 7.73% annually in the four years to 2012. Omnicom?s sales growth at 4.94% was just a tad better than WPP?s. Publicis also had the best net profit margin in 2012 and has been growing its profits at an average of 13.9% in the four years to 2012 ahead of 5.9% for Omnicom, but below the 17.4% -mark for WPP.
In an email response, Martin Sorrell, chief executive officer and founder, WPP reiterated to Brandwagon, what he had told the global press. ?It?s an extremely bold, brave and surprising move. It?s a great deal for Publicis, being a nil premium merger, and Maurice (Levy) is to be congratulated,? he said, adding, ?It does result in lower fast-growth market and lower digital proportions. Time will tell if the cultures will click and whether clients and talent benefit ? and how $500 million of synergies will be generated without job cuts. Co-CEOs is not an easy structure. Further consolidation in our industry was inevitable as we have said on many occasions. An equilibrium may be starting to be established, which will generate further significant opportunities for WPP organically.?
There is speculation amongst the global press that Sorrell will now make a bid for Interpublic Group (IPG) but the jury is still out, on whether that would come anywhere close to the Publicis-Omnicom combine. Boulding points out that it is interesting that media reports state that Sorrell has congratulated Levy, but not Wren.??You can?t help wondering whether Omnicom shareholders might start to doubt they have really got a fair deal. Their stock price fell on day one, whereas the Publicis? stock price rose,? he said.
The India/China piece
WPP has leadership position in two of the biggest emerging markets?India and China? and despite this merger announcement, will hold on to its crown prince status. Trade title Ad Age quotes Beijing based consultancy R3?s estimates which says that mainland China revenue in 2012 was $430.9 million for Publicis and $283.2 million for Omnicom. R3?s estimate for WPP?s 2012 China revenue was $971.4 million. As per a separate set of figures that R3 sent Brandwagon, WPP?s India revenue is $480 million, while Omnicom follows with a revenue of $140 million and Publicis has a revenue of $75 million. These companies in their financial results do not disclose revenues for specific markets.
An Omnicom spokesperson said, ?At this very early stage of the merger we are not in a position to provide comments on specific regions. What we can say is that Publicis and Omnicom?s merger will allow us much deeper coverage of the fast-growing developing markets in Latin America, the Middle East, Africa, as well as the Asia-Pacific region. Additionally, our core markets in North America and Europe will also be strengthened through a broad range of services and brands.?
The newly-created Publicis Omnicom combine has some iconic agency brands such as BBDO, Saatchi & Saatchi, Leo Burnett, DDB, TBWA, Razorfish, Publicis Worldwide, Flesihman Hillard, DigitasLBi, Ketchum, Starcom MediaVest, OMD, BBH, Interbrand, RAPP, Publicis Healthcare Communications, Proximity, Zenith Optimedia, GoodbySilverstein & Partners, etc. India has many of these agencies and clubbed together, it gives an interesting array of creative talent. On the media side, it gives added scale in a volume driven market.
Agencies belonging to the two groups in India remained guarded in their response. BBDO India and TBWA did not revert to Brandwagon?s queries. Nakul Chopra, chief executive officer, Publicis, South Asia, based out of India, remained unavailable for comment.
Arvind Sharma, chairman and chief executive, India subcontinent, Leo Burnett, part of Publicis Groupe said, ?We are really excited to be a part of what will now be the world?s largest communication group. It is important to bear in mind that this is not a merger of advertising networks. It is a merger of holding companies. In the immediate term, as Leo Burnett network, as always we will continue to focus on delivering best ideas, advice and service to our clients. However, in the coming months, each one of our networks will begin to see the benefits of scale. In the modern communication world, technologies, platforms, new expertise areas and new partnerships and alliances are becoming ever more important. And in all these areas, the scale advantage of Publicis Omnicom Group will benefit our advertising networks and our clients and people.?
Madhukar Kamath, group chief executive and managing director, DDB Mudra, a wholly-owned media and advertising agency which is part of Omnicom Group, said that the merger was the biggest news to hit the advertising industry in a long time, but these were early days yet. ?This merger between industry leaders will only help grow the advertising business,? he said.
The chief executive officer of a prominent media agency which is also part of one of the two merging groups, said that the top brass did not know what to make out of the developments. ?The thing about mergers and acquisitions is that it makes for some strange bedfellows. Agency chiefs are bewildered because now their rivals are extended family. They may be expected to collaborate closely with them,? said the CEO who did not want to be named.
?Omnicom and Publicis have been historically slow to (realise the opportunities in) India. It was only six years ago that Omnicom opened OMD on the back of a local Johnson & Johnson win. The recent Mudra acquisition was the first sign of any scale for the group. Publicis was likewise a laggard?Zenith Optimedia only opened its doors seven years ago, and despite the fact that there have been as many as three Publicis branded agencies in the market, they have never gained any critical scale. Leo Burnett India put up a good front for size and scale, but they are well behind Ogilvy, McCann, JWT and Lowe.?The merger will help the combined group get more scale, but apart from Mudra, it is going to bring together many middle and smaller agencies, with no signs yet of how they will combine and grow,? said Greg Paull, principal, R3.
Marketers spent nearly R40,000 crore on advertising in year 2012 across television, print, events and outdoor, said an analyst. As per Recma data sourced from media agencies, WPP buying arm GroupM controlled the majority of ad spends in 2012. Publicis Omnicom combine will account for spends of over R6000 crore and will be the second largest media buying entity in India.
Sam Balsara, chairman and managing director at Madison Media said that WPP was much ahead in terms of market share in India. ?While there is no doubt that a merged Publicis-Omnicom will be a much stronger force to reckon with, the WPP group is very dominant in India. It will take a lot for any competitor to catch up.? He added, ?All companies desire to be number one and everyone places special importance to that position. This merger, like many others, is driven by the intent to be the world?s largest. I don?t expect them to make any undue changes in agency structures, but it is likely that Mudra will no longer be allowed to function as an independent and will be integrated under the new company.?
Conflicting businesses
This merger also means that long-time rivals Coca-Cola and Pepsi will be sharing the same firm. There are several other rival business accounts too that will be housed under the same parent company. Omnicom handles US telecom giant AT&T and Publicis handles Verizon,another telecom brand. Coming to tech companies, Omnicom works for Apple and Microsoft and Publicis works for Samsung and Google Inc. Balsara, however, thinks that the issue of conflicting ad businesses is just a storm in a tea-cup. ?Agencies have learned to manage competing brands and advertisers are satisfied with how they are navigating conflicting businesses. For instance, Mediacom handles Procter &Gamble and is a joint venture between WPP-owned GroupM and Madison. On the other hand, GroupM also buys media for Hindustan Unilever. But confidentiality is maintained. When you have large networks with established agencies (as is the case with Publicis-Omnicom), you can park the business anywhere in order to maintain confidentiality,? he said.
Colvyn Harris, CEO, JWT South Asia , part of WPP, said that WPP has had a head start in India and it would be tough to displace it. ?Any merger involves streamlining of operations and may result in job cuts. This merger is one that spans 46 countries and there are operational challenges. WPP has had a head start in this market and yet, it has taken many years to integrate all its companies. It?s a long process and it requires a lot of management and bandwidth. The two companies need to be on the same page as far as values go.?
Point man for India?
It is likely that the holding company Publicis-Omnicom will bring in a point man who will drive the India operations and his authority will run across networks. This point man would be a rainmaker, driving expansion and revenues across various communication platforms. ?WPP has a country manager in India ? Ranjan Kapur ? to oversee the operations. It is likely that the Publicis-Omnicom group will bring in someone so that they can get the real picture of the ground realities without the salad dressing served up by the Indian management in these agencies,? said the CEO of a rival network who did not want to be named.
Santosh Desai, managing director and CEO, Future Brands said that it was quite likely that a point man will come in. ?Agency chief executives may have to report to him at some level, but this may not be a reporting structure in the strictest sense of the word. They may not want to interfere much with the existing agency structures,? he said. As per Desai, the merger is an event of huge global significance but of little local relevance, at least as far as Indian creative agencies go. ?Creative services are about confidentiality. The nature of the business is such that you cannot collaborate,? he pointed out.
Prathap Suthan, chief creative officer and managing partner, Bang in the Middle, said that the merger put the golden arc-lights on leading men and women from the Publicis and Omnicom groups. ?Arvind Sharma, Nakul Chopra, Madhukar Kamath, Jasmin Sohrabji ? when was the last time any of them reported in to anyone in India?? he asks. Every agency in the system had an ethos about it?a certain kind of creative thinking and culture that went behind it. To mess with that, was fatal, Suthan emphasised.
For advertisers, this merger gives a wider pool of talent to pitch and choose from, says Suthan. Bobby Pawar, chief creative officer at Publicis Worldwide, could now move across the network and take up bigger roles. The merger gives him leg-room to do so, remarks Suthan.
In this end, this merger is as personal as it is professional, he noted. ?It?s no secret that Maurice Levy has always held ambitions of being number one and beating WPP (Sorrell) while he?s at it. While this merger will obviously bring in economies of scale and business benefits, there is a larger and more important story of one-upmanship,? he said.