Yesterday’s Omnicom earnings call provided the clearest indications to date that the holding company’s proposed merger with Publicis Groupe is facing real challenges. While we continue to believe that a transaction is most likely to occur, investors will want to be incrementally more mindful of potential ramifications of a failure to complete the transaction. Most prominently, we think that industry M&A will continue to loom as likely until further consolidation occurs.
On yesterday’s call to review first quarter earnings results, Omnicom management indicated it is unable to anticipate when the merger with Publicis will close while highlighting potentially insurmountable obstacles for both sides (such as French tax authority approvals for Publicis, UK tax domiciliation for the combined entity for Omnicom and Chinese anti-trust approvals).
These comments amplified uncertainty provided on last week’s call with Publicis. Whether these factors are the primary issues or if others are at play which may reduce the companies’ willingness to look for “Plan B” alternatives (Omnicom management indicated there is no Plan B), the tone of comments will cause investors to diminish their expectations that the merger will be completed.
By contrast, we continue to believe that a transaction between the two companies is most likely to occur. Management teams on both sides have invested so much into the concept with clients, employees, regulators and shareholders that going back on the deal could have a range of negative repercussions.
Publicis has by now conveyed its weakness in creative agencies, and Omnicom its weakness in digital agencies. Publicis had to shift its stated M&A focus away from digital and emerging markets towards scale and developed ones, while Omnicom had to reverse its implicit positioning of the past decade that suggested it did not require more scale. Both have highlighted risks from larger technology companies.
Our view is that Publicis still has world-class creative agencies and Omnicom’s digital capabilities are top-notch, too, even if Publicis breaks out “analog” revenues in a manner that differs from how the agency industry generally operates and as Omnicom has never broken out “digital” revenues.
Technology companies do produce risks to agencies, but only over many years, a time-frame sufficient for adaptation.
Of course, negativity may be a function of how each company pitches itself in the aftermath of a break-up and the news they might provide, such as new emerging market and digital agency acquisitions, while Omnicom will have capacity for a significant stock buy-back which may go a long way towards engendering favorable relations for their constituency of investors.
More broadly, we think that investors need to be mindful of the read-through for the rest of the agency industry if we effectively revert back to a pre-July 2013 agency holding company landscape. M&A was always a possibility, if mostly viewed through the lens of whether or not Publicis might buy Interpublic. WPP has made clear their lack of interest in any acquisition of this nature.
Dentsu has made great strides over the past year in absorbing Aegis (meaning its management will not require as much focus on integration of that holding company in the coming year) while maintaining capacity on its balance sheet for further acquisitions.
Havas has new management and a common controlling shareholder at Vivendi, a company that is flush with cash following the sale of SFR.
And Omnicom, having now demonstrated that it believes in scale and that it can get a large scale acquisition through regulatory bodies in both the US and Europe may very well have a different appetite for M&A than it conveyed prior to last year.
As for clients? Our guess is most of them will either be content with the relative stability in their day-to-day client team relationships, which are mostly independent of holding company machinations and which won’t have changed much over the past year. At the same time we can imagine that they will be generally relieved when more stability takes root across the industry.