By JENNIFER MAGRUDER
Media giants Omnicom and Publicis merger begins to show signs of stress as Omnicom earnings slide two percent in the fourth quarter of 2013 due to merger-related fees.
Despite a strong fourth quarter in overall revenues for Omnicom, high costs associated with professional fees from the merger with Publicis Group eroded net income at the end of 2013. Despite the slight decline, industry experts are still optimistic that the merger between the two companies will create the world’s largest advertising agency and approve.
Due to the global scale of this combined company international, regulators heavily scrutinized the proposed deal, only recently approved by the EU Commission in January 2014. Other nations such as China and Columbia still have yet to give the green light for the merger due to the dynamics of the proposed organization’s buying power and its impact on other competitors.
Omnicom Group Inc. is a U.S.-based advertising, marketing, public relations and communications holding companies comprised of several smaller award-winning agencies such as OMD, BBDO, TBWA Worldwide. The group actively services several large brands such as Volkswagen, McDonalds, Johnson & Johnson and ExxonMobile. Headed by CEO John Wren, Omnicom reported $300.5 million in net income for 2013 driven by approximately $4.06 billion in revenues annually.
Publicis Groupe, a French based international advertising, media and communications holding company, is comprised of several award-winning agencies such as Starcom Medivest Group, Digitas, Razorfish and Leo Burnet. The group of agencies also services a number of globally recognized brands such as Mercedes Benz, Delta Air Lines, American Express and Coca-Cola. Publicis Groupe CEO Maurice Levy has been at the helm of the organization since 1987, reported $792 million in net income in 2013, driven by $6.9 billion in revenues annually.
The merger’s projected value is approximately $35 billion, which would put under a single roof the largest advertising entity in the world. The combined company is expected to create enormous media buying power abilities for its roster of clients across publishers, digital ad serving networks and television distribution channels.
“The merger will give the parent organization media buying and planning rights to more the 50 percent of the available advertising space in the world,” said Kevin Sweeny, senior vice president of finance for DigitasLBi, a subsidiary of Publicis Groupe. “The access to that media placement should trickle down to the agencies in the form of lowest end pricing for media inventory which will play as an advantage to reeling in media heavy clients from our competitors.”
Despite the heavy criticism from competitors, EU regulators approved the merger in January, which, along with the US, represent the world’s largest media markets. Other countries that have already approved the merger are South Africa, South Korea, India, Turkey and Canada. Despite the advantage in media buying power, price influence and economies of scale, not all is projected to go smoothly from an internal conflict of interest standpoint.
Because of the number of agencies to fall under the new entity, several client brands are subject to conflicts of interest for example, Coca-Cola and Pepsi, Delta Air Lines and United Airlines, McDonalds and Burger King. Agencies, which previously represented competitor brands, will now sit under the same parent entity, which may or may not sit well with their existing client base.
“What we’re seeing is a lot of time being spent into the diligence around the conflicts of interest between our clients and those of our sister agencies,” said Daniel Gonzales, associate director of finance for DigitasLBi. “Several of our existing client contracts call for exclusive services in each sector we operate, Travel, Food, HealthBeauty, Finance, Agriculture and Pharma.
“We’re in the process of renegotiating our master services agreement to include exceptions in very specific instances, whereas we can create operational distinctions between the services we provide to our clients, versus the services to our sister agency clients. It hasn’t been all gravy … Some clients are attracted by the level of media buying power, and some clients are not attracted, and more concerned about brand strategies remaining confidential between sister agencies.”
Third party legal fees to support these discussions have contributed to the additional merger costs, diluting net income for Publicis Groupe as well as Omnicom.
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