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Omnicom-Publicis Bust-Up Shows Limits of Holding Co. Model

Linking Two Behemoths Failed, and Targets That Move the Needle Are Scarce

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Credit: Photo illustration by JOHN KUCZALA

From the biggest bang to the littlest whimper in just nine months.

The proposed Publicis-Omnicom merger was stunning in size. The announcement made the industry ponder its future, and the dissolution does the same, calling into question the kind of scale a holding company can achieve, how fast and at what cost.

The deal's autopsy will reveal internal trauma, and possibly death by fear of taxes. But it never completely made sense, at least as described by the companies. The proposed savings ($500 million) were relatively paltry for a $35 billion tie-up, and the strategic logic wasn't completely evident beyond "big equals better." If it had been, the companies' respective share prices would have reflected it, and walking away wouldn't have been an option (shareholders on at least one side would have revolted). Instead, Omnicom's shares were up the day after the deal was squashed; Publicis' stock fell slightly. Overall, they barely budged during the engagement.

"There are probably more reasons why this didn't work than reasons why it should have worked," said Forrester's David Cooperstein. "The minimal advantages of the merger -- scale and succession planning -- were likely outweighed by the disadvantages of being able to execute on such a complex and hastily arranged deal. Media-buying power and back-office saving do not outweigh client service and the cultural barriers of two global holding companies. Most clients and partners will be relieved."

It's possible that a better-articulated deal (and one with fewer complexities, from regional tax issues to dramatically different cultures) could have survived. Scale can have plenty of merits, of course -- negotiating leverage and capital efficiency chief among them. But the largest holding companies already have the ability to fully service global clients. What more can two really achieve by becoming one?

Publicis and Omnicom "are completely complementary," said Brian Wieser, an analyst with Pivotal Research. "This was literally bolting on one big thing to another big thing."

For Omnicom, Publicis and WPP -- the three largest agency companies by revenue -- targets that move the dial in a big way are harder to come by. According to data from Dealogic, since 2009 those companies combined have only made six acquisitions with price tags in excess of $100 million. Tops was Publicis' $575 million deal for Rosetta Marketing Group in 2011.

That's not an insignificant number, but it also doesn't effect shock (or stop presses) when you're talking about companies that generate in excess of $9 billion in revenue, and WPP producing nearly twice that.

"There's nobody else to merge with," said a Publicis executive on the future of mega-mergers. "If Interpublic [Group of Cos.] was merged with either us or another top holding company, it's not a merger. They're a third of the size. It's not even close." (At close of trading Friday, Publicis had a market capitalization of about $17.6 billion, compared to $7.6 billion for IPG.)

That's not to say there won't be transformative deals. They're just more likely to occur outside of the three largest holding companies.

Indeed, now that Publicis-Omnicom has been scrapped, the largest deal among ad companies is once again Dentsu Inc.'s $4.9 billion acquisition of Aegis Group for $4.9B in 2013. That deal gave the Japanese ad giant media scale beyond Asia.

The biggest companies will continue to have plenty of deal appetite, but what they can achieve is muted, which will keep the mega-mergers at bay.

"There still has to be a lot of M&A," said MDC & Partners CEO Miles Nadal. "[This deal] will just change the fact that these firms will be a lot more careful, cautious and strategic and make sure they dot their I's and cross their T's."

Top-line growth is a challenge for companies this size, and most have mastered squeezing out costs, which does leave deal-making as a way of life.

"Three-to-five-percent growth is not a story that excites Wall Street," said John Partilla, CEO of agency Olson and former chief operating officer of Dentsu Network West. "Holding companies need to supplement organic growth with acquisitions."

And with so many mouths, not everyone can be fed. That should lead to more consolidation of those at the bottom; already there's been a frenzy of tiny deals in the digital and data spaces. WPP CEO Martin Sorrell says his company has made between 60 and 80 acquisitions since last summer, but few are material enough to even disclose.

There are even newcomers to the space, which could limit opportunities and drive up prices. Mr. Partilla said private equity has developed more of an appetite for business-services companies like digital agencies because they spill over into content creation. "The set of hunters has broadened," he said. (Olson is backed by private-equity firm KRG Capital Partners.)

For all the acquisitions holding companies make, there are relatively few asset disposals. If top-line growth turns more difficult, it's possible holding companies will be forced to take a closer look at their portfolios and consider what doesn't really fit rather than looking for a huge deal.

But following the tumultuous ride Publicis and Omnicom just took everyone on, saying never is a bad idea.

"How can we not keep open to the possibilities that they may do something?" asked Mr. Wieser.

Contributing: Angela Doland

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