Market Insight

Global ad industry shakeup: our take on the Publicis Omnicom merger

July 29, 2013

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France's Publicis and America's Omnicom announced a merger that would form the world's largest advertising group. The combination of the current number two (Omnicom) and three (Publicis) advertising agencies would create an entity with combined 2012 revenues of €17.7bn ($22.7bn), usurping current market leader WPP who had revenues of €12.7bn ($16.8bn) last year.

Pending regulatory approval, the new holding company will be named Publicis Omnicom Group. In what parties call a merger of equals, it will have dual headquarters and listings in both Paris and New York. Publicis CEO Maurice Levy and Omnicom CEO John Wren will jointly lead the firm. Seven representatives from each merging firm will support them on the board of directors.

The combined companies chose the Netherlands as a neutral third country to register the new holding company. To avoid connotations of a tax haven, Ireland and Luxembourg had been ruled out. Publicis and Omnicom expect to complete the deal later in 2013 or beginning on 2014, depending on the pace of regulatory approvals.

The deal has wide-ranging implications for the global advertising industry. Key factors are:

  • Deal brings much-needed consolidation to the ad tech world. Key motivation for Publicis and Omnicom to merge has been the growing dominance of Google and Facebook, whose advertising operations either bypass agencies or whose scale and efficiencies put agency margins under pressure. Agencies across the board have ramped up their digital advertising buying and analytics solutions to compete with these large audience aggregators. Emerging markets are still up for grabs. Agency groups are keen to build scale quickly ahead of competitors and before Google and Facebook acquire the dominance they have in established markets. However, agency strategy has also lead to a siloing of the digital advertising market. Agencies have built parallel infrastructures that are often not compatible with each other. When entering into relations with an agency, advertisers implicitly commit to a whole digital ecosystem of agency solutions and agency relations in which they are locked in. The Publicis Omnicom merger can dissolve such silos, improving scale and efficiency. For this to happen though, Publicis and Omnicom need to go beyond bringing together data infrastructures and learn how to execute media plans together.
  • Consolidation is set to improve agency profit margins as it reduces competition for advertiser budgets. Agency pitches for advertiser budgets are often price-driven, with agencies undercutting each other in particular for large, global accounts. This is exacerbated by growing price consciousness at large advertisers where marketing budgets are increasingly set by procurement or auditing, and not by marketing divisions. Agencies are keen to acquire such accounts in order to maintain a global scale of operations. Reduced competition is likely to ease pricing pressure.
  • Agency merger is bad news for media owners globally as power shifts to the buy-side. With fewer agencies competing for advertising inventory and a new behemoth on the market, media owners will be exposed to higher pressure on their ratecard prices as their negotiation power weakens. Its new dominant market position will also allow Publicis Omnicom to adopt bulk buying of media inventory at highly discounted prices, a practice pioneered by WPP. This can accelerate a wider shift to the commoditization of advertising inventory, where questions of cost-effectiveness supersede traditional considerations around the effectiveness of the advertising message. Yet, not all media owners are affected equally. For instance in the UK and Germany, WPP will remain the dominant agency in terms of market share post-merger. Broadcasters ITV and ProSiebenSat.1 have already indicated that they expect little influence on their negotiating position.
  • Further agency group consolidation is now an option, although not imperative. Agency rivals WPP, IPG and Havas have been quick to publicly question the potential for synergies in the Publicis Omnicom deal or the need for scale in a digital ecosystem. But we see those claims largely as tactical measures to communicate continuity and appease clients, partners and staff alike. WPP's ability to impose bulk buying and formulating more aggressive policies around the use of client data than competitors largely depended on its position as undisputed market leader. IPG and Havas face pressure as newly formed Publics Omnicom and WPP are both outperforming them in terms of scale. While further consolidation does not follow naturally, the merger announcement changes the competitive landscape so radically that other agencies will now closely investigate potential combinations.
  • Publicis Omnicom can expect significant synergies, but integration efforts may threaten short-term agility. In the deal, Publicis will gain better footprint in the US, deeper below-the-line expertise and creative capabilities. Omnicom will receive greater presence in China and advance its digital strategy on the back of existing Publicis infrastructure. Publicis has invested heavily in digital through notable acquisitions, such as Razorfish and LBi. In April 2013, Publicis-owned agency Starcom MediaVest also signed a multi-year deal with Twitter for measuring and tracking advertising across digital and TV. Yet, creating synergies across such a range of business units threatens to reduce overall agility and responsiveness to client demands. Both agencies will need to devote serious resources the streamlining of operations. Short-term, this preoccupation with internal affairs may divert clients into the hands of rivals.
  • Serving competing clients like PepsiCo and Coca Cola alike means that some potential synergies cannot be realised, but that is normal. Client relationships will not be destabilized by the merger. Publicis and Omnicom handle clients that compete in their respective market segments. For instance, Publicis serves PepsiCo and Samsung, while Omnicom handles accounts for Coca Cola and Apple. To maintain trust and prevent client churn, Publicis Omnicom will have to keep critical infrastructures, processes and human resources separate or duplicate them. However, in contrast to other market commentators, we do not think this will destabilize client relationships. The fact that big-ticket accounts and arch rivals like Apple and Samsung are converging into one agency group is an exceptional situation. But both Omnicom and especially Publicis are acquisitive companies. This means they have scooped up agencies handling rival accounts before. In turn, they have established due processes to safeguard client information and are experienced in handling conflicts of interest.
  • Strictly speaking, the Publicis and Omnicom deal is a merger of holding companies, not of actual agencies. Failing to understand this may result in overstating the negative effect of the merger on long-term agility, increased bureaucracy and threat to creativity. Both Publicis and Omnicom agencies operate under the umbrella of holding companies, each with a particular corporate identity. Certain processes, a lot of infrastructure and services are centralised. However, the actual agencies themselves - creative agencies, planning and buying agencies, research institutes - operate relatively independently. They are unlikely to be drowned in bureaucracy beyond an integration period. They are also not going to be creatively more stifled just because the new parent company is larger. Such effects are much stronger for a start-up that goes through an IPO and thereby qualitatively changes the way it operates. But there is little evidence that enlarging a company that is already publicly-listed has to navigate similar challenges. WPP as the largest of the global agency groups until now is not significantly more bureaucratic than for instance Havas. But Havas is significantly more bureaucratic than an ad tech startup.
  • The merging companies have taken precautions against regulatory challenges, but it is not a done deal. Spinning the deal to authorities will be important for getting a green light. The deal is exposed to regulatory intervention from the French government and US antitrust authorities. In May 2013, the French government vetoed Yahoo's plan to take a 75 per cent stake in Paris-based online video portal Dailymotion as it feared a US firm was devouring the company. We do not expect similar concerns in the proposed merger of equals. The co-CEO solution and the even structure of the board between Publicis and Omnicom representatives ensure French influence. US-antitrust concerns are more pressing, as some of the largest advertising and PR firms like BBDO, Saatchi & Saatchi, Leo Burnett, Ketchum and Fleishman-Hillard will now operate under one roof. How to spin the deal to the authorities is critical. We expect Publicis and Omnicom to frame it as a digital data alliance, where competitors are not other advertising agencies, but players like Google and Facebook on the one hand, and marketing technology providers like IBM or on the other. This may ease antitrust concerns.


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Media & Advertising
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