Madison Avenue Merger: Omnicom, Publicis Combination To Reshape Industry

Deal would give advertisers new leverage in dealing with media outlets ranging from CBS to Facebook

Two of the world’s biggest advertising companies said Sunday they would merge, in a maneuver likely to affect big-spending marketers like PepsiCo and Coca-Cola as well as media companies like CBS, News Corp. and Walt Disney who count on ad dollars to help fill their corporate coffers.

The two companies, Omnicom Group of New York and Publicis Groupe of France, said they would combine into an entity known as Publicis Omnicom Group, so long as the deal wins regulatory approval, by late 2013 or early 2014. The new company, should the pact move forward, would represent billions of dollars in ad spending that flows to TV, print, digital and other media.

The new concern would include such agencies such as BBDO, Saatchi & Saatchi, DDB, Leo Burnett, TBWA, Razorfish, Publicis Worldwide, Fleishman-Hillard, DigitasLBi, Ketchum, StarcomMediaVest, OMD, BBH, Interbrand, MSLGROUP, RAPP, Publicis Healthcare Communications Group, Proximity, Rosetta, CDM, ZenithOptimedia and Goodby, Silverstein & Partners, to name just a few. At present, Omnicom represents advertisers like Apple and PepsiCo., while Publicis works for Procter & Gamble and Coca-Cola.

Maurice Levy, chief executive of Publicis and John Wren, chief executive of Omnicom, will serve as co-CEOs of the new concern, although Levy will later move to become non-executive chairman while Wren will eventually have sole day-to-day oversight of the new ad giant. Together, said Levy, the new company is expected to have approximately $2 billion in net income and $23 billion in revenue.

In a conference call held Sunday, Wren and Levy billed the merger as a way for the two companies to move faster into emerging markets like India, China and Brazil; a means to have more speed when grappling with the massive changes in consumer behavior sparked in recent years by the advent of digital technology; and an attempt to gain more leverage and scale when dealing with a host of media concerns old and new that could include everything from CBS and Fox to Amazon, AOL and Facebook.

Publicis’ Levy said the new concern would represent “a new company for the world of today and the world of tomorrow.”

Whether all the clients of both concerns remain with the new entity remains to be seen. Advertisers have long been known to be loath to dock their ad business with agencies that also work with their competitors.

Indeed, Omnicom has a decades-old relationship with PepsiCo., having devised everything from the slogan “The Choice of a New Generation” to Pepsi’s massive sponsorship of Fox’s “The X-Factor.” Publicis has for several years negotiated Coca-Cola’s presence in everything from “American Idol” to the Super Bowl. Would two fierce rivals want a single entity to have access to both companies’ marketing strategy and budgets?

In the past, the answer has in some cases been “No.” PepsiCo in 2001 pulled ad work for brands such as Gatorade and Tropicana from Foote Cone & Belding after the agency’s parent was acquired by another rival, Interpublic Group, because of its work for Coke.

“Do I expect to have difficulties? Yes. Do I expect there to be solutions? Yes,” said Wren, who added that he did not expect any client losses to be material to the new concern.

In some cases, Wren said, the new company could stand to knit together business that the two individual players hold from single clients. Levy said advertisers have grown more accustomed to parking accounts at separate agencies owned by the same company so long as a “Chinese wall” could be established to the advertiser’s satisfaction.

The deal is likely to place pressure on rivals to build scale. WPP of the United Kingdom, is at present the largest of the wold’s ad-holding concerns, and has of late made acquisitions in research and digital advertising. Will its leader, Sir Martin Sorrell, feel a need to bulk up even more? Interpublic Group was crippled in the past by an accounting scandal that drew regulatory scrutiny, though it has emerged from that period of its history. Might it be seen as a partner or potential acquisition by ad companies like Havas of France or Dentsu of Japan?

More than anything,however, the proposed merger would seem to illustrate the new pressures placed on ad conglomerates by a new marketplace in which advertisers want global reach but also finesse demanded by new media venues that reach smaller but more easily defined audiences of consumers than traditional media outlets like TV and newspapers.

To deal with a host of new ad methods and new sellers of ad space, companies like Omnicom and Publicis may need each other to work more quickly and have more leverage in negotiations that take place around the world and may include everything from an ad placed alongside a piece of streaming video; a product tucked into the script of a major TV show, or a promotion beamed to a consumer on a mobile phone or tablet.

The two companies may be merging at a time of economic and strategic uncertainty for many advertisers. Spending by automakers has been in flux in recent years, particularly by U.S. players. Pharmaceutical marketers have been spending less in the U.S., as have movie studios.

To be sure, other parts of the world like China and India have tended to draw more advertiser interest, as rising economies bring new chances to sell products. According to ad-buying concern ZenithOptimedia, the global advertising market is on a path of steady recovery, with growth of 3.5% forecast for 2013, followed by 5.1% in 2014 and 5.8% in 2015.

In the U.S., ad spending on traditional media and Internet display advertising rose just 3%, according to Kantar Media, and was flat in the first quarter of 2013. In the recent TV “upfront,” an annual U.S. market in which advertisers reserve ad time for the coming fall season, volume committed so far appears to be down for the first time since 2009.

The two companies have apparently been negotiating for about six months, Wren said. Publicis’ Levy first broached the idea, and talks “got more serious as we kept going back,” he said.

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