How Empires Fall: The Publicis Omnicom Merger Underscores The Rapid Decay Of The Ad Industry

Publicis Group and Omnicom, two of the world’s biggest ad agencies, have announced a merger to create the world’s biggest advertising group. The companies’ public statements about the merger, and the market dynamics forcing this combination, underscore the rapid decay of the advertising industry. The ad industry is crumbling – the merger is creating little more than a house of cards.

Each company will own a 50 percent stake in the new business, to be known as the Publicis Omnicom Group. The combined entity will have revenues of $23 billion and a market capitalization in excess of $35 billion. According to AdAge, the combined U.S. revenues for the new entity, at $11.4 million, will be twice the nearest competitor, WPP (the current industry leader). Regulators in 46 countries will need to approve this merger.

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According to Publicis CEO Maurice Levy,

The communication and marketing landscape has undergone dramatic changes in recent years including the exponential development of new media giants, the explosion of big data, blurring the roles of all players … John and I have conceived this merger to benefit our clients by bringing together the most comprehensive offering of analogue and digital services.

Omnicom CEO John Wren identifies other benefits:

This combination will enable us to leverage the skill of our exceptionally talented people, our broad public offering, enhanced global footprint, and tremendous roster of global and local clients.

I smell something very foul here.

Rapidly shrinking budgets and more demanding clients are forcing agencies to be more entrepreneurial, more agile, and to offer their services for less money. Yet, at a time when the ad industry is crumbling and agencies are being forced to evolve or die, two of the top market leaders have decided to double-down on history.

What is pushing Publicis and Omnicom to merge?

At the press conference announcing the merger, Publicis CEO Levy said: “this is a new company for a new world.”

Levy’s statement is pure fiction.

The Publicis Omnicom merger creates a new company, but that new company is fundamentally unaware of the new world.

Remember the disastrous merger between AOL and Time Warner? That merger was also spun to the world as a merger of equals. That merger was also intended to benefit clients, to leverage talent, to create a bigger and more sophisticated global footprint, and to achieve cost-savings. It is widely considered to be the worst merger in history.

The Publicis Omnicom merger may be creating a new company, but the merger completely ignores the new world.

The notion that a merger of large organizations is driven by a desire to help clients is misguided. When two leading agencies merge, the list of actual and potential conflicts is enormous. In most professional service industries, such mergers fail. In fact, accoring to Clayton Christensen, et. al. writing in the Harvard Business Review, “study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%”. Such high failure rates are not surprising. The combined entity will need to reconcile PepsiCo vs. Coca Cola, AT&T vs. Verizon, and many other large accounts. This merger is not about clients.

Nor is this merger about talent. Is it possible that the separately, the two entities were grossly lacking in talent but combined, they’ll suddenly have a group of “exceptionally talented people” helping to service global and local clients? Is it conceivable that two industry giants, without the merger, would be incapable of servicing the traditional and digital advertising needs of their clients? The claim that this merger is intended to help clients is pure rhetoric.

Nor is this merger about “big data.”According to Forbes, Levy said:

Changing consumer behavior, new talent to emerge, big data explosion, access to new tools – this leads to a powerful new solution for our clients … Our mission together is to create that new center.

The claim that this merger is about big data is a red herring, or even worse, a gross misunderstanding of how big data can be leveraged. Neither Publicis nor Omnicom are technology companies. Merging two holding companies doesn’t create a more sophisticated technology company. At best, the holding companies know how to spell “big data.” The merger will not create another Facebook or Google. Moreover, as Brian Morrissey correctly points out in his look at the winners and losers of Publicis Omnicom, the data belongs to the clients, not the holding companies.

Some have asserted that the merger will allow the combined entity to purchase advertising at cheaper rates. That is untrue. Most  media buys today are auction-based. The merger will do little to impact ad purchase prices (TV might be the sole exception).

The Publicis Omnicom merger isn’t about clients, talent, or “big data”. It’s about one thing: shareholders.

The two companies announced that they expect up to $500 million in cost-savings from the merger. That’s not surprising. We can expect to see layoffs, especially in middle management. With more 130,000 employees between them, there will be plenty of opportunities for cost-savings.

Holding companies are popular in the ad industry because size is believed to reduce cost and redundancy. Many believe that economies of scale increase as the size of the organization increases. But at some point, economies of scale run out.

In fact, I’ve long believed that the holding company structure is holding the entire ad industry back. A few years ago, I asked a question on Quora: “Is the holiding company structure detrimental to the evolution of agencies?”. Ben Kunz, VP of Strategic Planning at Mediaassociates offered his smart perspective:

Not detrimental, just a maturation that slows ideas, in my view.

Holding companies are a normal part of advertising service evolution. Any industry’s new services go through an evolution of innovation, consolidation, and monopolization — think railroads, phone networks, computer operating systems, and today’s social nets (rapidly consolidating into Facebook and Twitter). So agency maturation always ends up in the big players.

The trouble with holding companies that I see is they attract agencies at the mature end of the spectrum who may be furthest away from the innovation fueling new media results. They also have higher cost structures (in my view) since they must draw profits out of the organizations in their tanks. Energy comes from the fringe, and while it’s chaotic, the evolution of new ideas in my mind comes from the Barbarian Groups of the future who break out for a few years to build new techniques, which will later be adopted elsewhere.

(emphasis added).

The Publicis Omnicom merger reveals the short-term, industrial-world thinking of ad industry leaders. It is a fool’s bet.

  • blipsman

    An interesting take… I’ve been trying to decide what to do with my OMC shares from my days with one of their agencies, and this is helping push me toward selling. It would seem much of the “synergies” comes from unifying the back office functions of agencies, and yet Omnicom is only now doing so with functions like IT and finance and they’ve had their collection of agencies for decades. I believe Publicis did more of this a few years back, but how long will it take for this to roll out among the merged holding company? And how many premier clients bolt because they don’t want their agencies under the same holding company as competitors? How much of those $500 million in savings are then lost on the billings side if Pepsi or Verizon bolt?

    • Ross Kimbarovsky

      Thanks so much for sharing your perspective. These large mergers are extremely tricky – especially when it comes to the need to integrate lots of disparate technologies. And then again, it’s not very apparent how much integration could take place. After all, the holding companies are merging but the actual agencies, even within the existing structures, share few resources. Without a significant change in culture, this is simply a fresh coat of paint on a really old and tired fence that is about to fall down.

  • http://edwardboches.com/ Edward Boches

    Best analysis I have read yet. The mainstream press repeats, mimics, quotes, but fails to analyze, question, challenge or counter. This does all four. Thanks.

    • Ross Kimbarovsky

      Many thanks, Edward. It is truly astounding how the mainstream press has grown to simply parrot press releases. But then again, they have their own problems to consider.

  • benkunz

    It seems rather obvious how this will benefit PublOmni: A half billion dollars in savings boosts the bottom line, and PublOmni now controlling ~20% of global ad spend means clients are more likely to stay in the portfolio even if they switch around inside, thus protecting PublOmni revenue. I’m not certain what the value for clients is, however. I stand by my long-ago assertion (that you quoted, thanks) that innovation happens around the edges. I know PublOmni has major-league talent inside … but if I were a client, I’d want to work with the scrappier talent on the outside. The word “idea” has two roots, from one meaning “prototype” and other meaning “vision.” I think new visions are built on the edges of society, not in the middle.

    • Ross Kimbarovsky

      Ben – thanks for stopping by and leaving your thoughts. I’m not sure the $500 million in potential savings is a foregone conclusion. Large mergers like this rarely turn out to squeeze the savings they anticipated and often run into unexpected costs (such as when key clients leave). People (really, consultants who stand to profit handsomely from the merger) understate the difficulty and overstate the savings.

      Love your perspective on how new visions are built!

  • Dave

    This is insightful, and I think this could have been written in the 90′s as well although I think then it probably would have been a bit different (since there was no Google and no Facebook). Back then it was scale to beat up on publishers and broadcasters–it was all about media planning.

    Your observation is pretty keen, but I’d be suspect this will go through in any form (France does not like mergers… gee, only 40 more countries to go!).

    But in a somewhat related post, I landed here from a friend who linked it on her facebook page. So I look at your bio here and, as a creative, have to ask myself what’s worse for the industry? A big network or crowdsourcing? Nothing personal, but you’re not exactly conflict-free, Ross.

    • Ross Kimbarovsky

      Dave – absolutely fair question (what’s worse) and a topic that I have talked about extensively. But I would suggest a slightly different question that would be more relevant to both issues – the question isn’t ultimately what’s worse for industry insiders (as you imply) but what is, overall, best/worse for the industry AND clients.

      Crowdsourcing is a double-edged sword. It’s often great for clients and is tremendously powerful for agencies that have figured out how to leverage it properly. And yes, it can be devastating – as it should be – to agencies that refuse to evolve and hang on to outdated, expensive, and ineffective strategies.

      But I am not sure why a huge holding company can be helpful to the industry OR to clients (and it seems you agree with this conclusion). I’ve yet to see any clients speak highly in favor of this merger – or to hear anyone articulate legitimate reasons why clients would benefit. I definitely see how the merger benefits some insiders and possibly, shareholders.

      Ironically, the effect of the merger may indirectly benefit the industry. By trying to build a leviathan, Publicis and Omnciom will inadvertently empower many independents and small agencies. Perhaps that’s a kick in the behind the industry ultimately needed (but I don’t think it will, by itself, be enough).

      Many thanks for taking the time to comment.

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