Publicis groupe / YouTubeThe first "Publicis Omnicom Groupe" press conference ended today amid applause and smiles at the news that the two ad agency holding companies will combine to become the world's largest ad network, with $23 billion in revenues.
But applause for what, exactly?
The merger will come with some significant downsides. Here are a few of them:
1. There will be layoffs. The companies said in their press release that they expect to get $500 million in "efficiences." That means job cuts. 60-70% of holding company operating costs are salaries. So $300 million of those efficiencies are likely to be duplicate salaries that can be cut. If you assume that the fully loaded cost of an employee is about $200,000 per year (including benefits), then that could mean up to 1,500 jobs lost. Most of those jobs will be in administrative and back-room positions. Wren said "there's no planned job cuts," but believe that when you see it.
2. Shareholders get chump change from the deal. Normally when there's a merger between two publicly traded companies, the acquired company's shareholders get their stock bought out at a premium, thus rewarding them for putting money into the company. Not this time. Because it's a merger not a takeover, neither stock will get a premium. The deal is actually designed to prevent that from happening. Omnicom holders will get a $2 dividend. Publicis holders will get 1 euro.
3. Omnicom CEO John Wren will get richer. Already one of advertising's richest men, the deal will likely trigger a change in control clause that will net Wren upwards of $4.3 million. It's not clear what will happen to the OMC shares he currently owns — more than 1 million of them, worth about $70 million. (Levy gets his full deferred compensation in the event of a new majority shareholder. That payment was already agreed before the deal, due to Levy's impending retirement).
4. Clients will leave these two networks. Both Omnicom CEO John Wren and Publicis CEO Maurice Levy gave little detail on how many client conflicts the combined company now has. Wren said there were about $6.5 billion in overlapping revenue on shared clients. He added that he did not believe the conflicts — in which the company finds itself serving two rival clients — would result in material losses. But tell that to Coca-Cola, which is now required to tell its marketing secrets to Publicis' Leo Burnett, all the while knowing that Pepsi is listening to advice from Omnicom's TBWA. These two agencies are now a mere phonecall apart. Maybe their two soda giants will live with the conflict. Clients have become increasingly tolerant of them over the years. But not all will. S.C. Johnson, for instance, is known to be rabidly anti-conflict — so that account could well bounce out of BBDO and head toward WPP's Ogilvy, the other agency on the business.
5. There will be an effective duopoly in advertising. Although there are several other agency holding companies to choose from, the lion's share of the business will now be controlled by just two companies, Publicis Omnicom and WPP. Craig Le Grice, the former digital lead at WPP and now chief innovation officer at Blue Rubicon, tells me, "How much competition does this create? In markets like the U.S., specifically, how much trust can there be with such a duopoly? I am unsure that major clients like Procter & Gamble (etc) want to have to choose between just two holding companies for their billion dollar annual spends. Even if they do, the lack of competition will reduce the need to genuinely create stand out work — which is a blow for strategy and creative."
So there it is. The top named executives in both companies will likely get bonuses triggered by change-in-control clauses. Shareholders get very little. Clients get less choice. And employees get to update their resumes.
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