Why Publicis and Omnicom Shares Have Fallen Over Past Month

Some Investors Take Profits, Others Wait To Learn More After Merger Announcement

By Published on .

Investors have had one month to digest the planned merger of Publicis Groupe and Omnicom Group, so what's up with the stocks? They're down.

What's Happening With Agency Stocks

Publicis Groupe and Omnicom Group signed a merger agreement on Saturday, July 27, 2013. The firms on Sunday, July 28, 2013, announced their deal to create the world's biggest agency company, Publicis Omnicom Group, subject to regulatory and shareholder approval. Stocks of both firms are lower now than they were before the announcement, underperforming key rival companies and the Standard & Poor's 500 index.

CLOSING PRICES Omnicom (OMC) Publicis (PUB) WPP (WPPGY) Interpublic (IPG) S&P 500
Monday, Dec. 31, 2012 $49.96 €45.25 $72.90 $11.02 1,426.19
Friday, July 26, 2013 $65.11 €59.35 $90.83 $15.87 1,691.65
Monday, July 29, 2013 $64.75 €59.40 $90.68 $16.61 1,685.33
Wednesday, Aug. 28, 2013 $60.22 €55.35 $91.65 $15.65 1,634.96
Aug. 28, 2013, vs. Dec. 31, 2012 20.5% 22.3% 25.7% 42.0% 14.6%
Aug. 28, 2013, vs. July 26, 2013 -7.5% -6.7% 0.9% -1.4% -3.4%
Aug. 28, 2013, vs. July 29, 2013 -7.0% -6.8% 1.1% -5.8% -3.0%
Notes OMC hit all-time high ($70.50) in intraday trading on July 29. PUB on July 29 reached its highest intraday price (63.27 euros) since 2000. WPPGY on Aug. 23 reached its highest intraday high ($95.44) since 2000. IPG July 29 hit its highest intraday price ($17.43) since 2002. S&P 500 on Aug. 2 hit its all-time high (1,709.67).

Omnicom shares have dropped 7.5% since July 26, the last trading day before the companies announced a deal to create Publicis Omnicom Group, the world's biggest agency company. Publicis over that period has fallen 6.7%.

Rival WPP, meanwhile, edged up 0.9%, and Interpublic Group of Cos. declined 1.4%. The Standard & Poor's 500 index fell 3.4%.

Shares of Omnicom and Publicis initially surged July 29, the first day of trading after the announcement, with Omnicom reaching its all-time high and Publicis trading at its highest level since 2000. But by close of trading that day, both stocks had pulled back from those highs. And the stocks have dropped further since then.

Why the muted reaction to the biggest deal in agency history?

Publicis and Omnicom declined to comment for this article, but it's possible that the price drops partly reflect profit taking after both stocks had a major run up. Publicis and Omnicom have outperformed major stock indexes year to date, so it's probably not surprising that some investors would cash in and place their bets elsewhere.

Publicis and Omnicom have offered little new information about the deal in recent weeks, but both companies are likely to provide investors more details in September and beyond.

Onus on partners
There are other possible reasons neither stock had a sustained near-term surge coming out of the merger announcement.

First, this transaction was designed as a merger of equals (rather than a deal where one company buys another at a premium, in which case the acquired company typically would see its stock price jump).

Second, it will take time for Publicis and Omnicom to deliver. The deal must clear various regulatory hurdles. Assuming the companies succeed in completing the merger by their fourth-quarter 2013 or first-quarter 2014 target, it still will take them a number of years to extract their intended $500 million in cost savings and to get full benefits of the merger.

Third, the stock market itself has come down from August highs amid broader issues including the prospect of a U.S.-led military strike in Syria.

One month doesn't tell the story of this deal. Still, the onus is on the two companies to communicate to investors the benefits of this transaction, particularly since Omnicom, the second-largest agency firm, and No. 3 Publicis were doing fine before announcing the massive merger.

Greater scale
Brian Wieser, senior research analyst at Pivotal Research Group, is bullish on the deal, saying Publicis Omnicom will, among other advantages, have greater scale in purchasing media that will benefit clients and help produce stronger financial results for investors.

But he said the pullback in stock prices, particularly for Omnicom, reflects skepticism among some investors.

Mr. Wieser said Publicis shareholders should not be surprised that Chairman-CEO Maurice Levy pulled off this pact since he has a history of doing major deals. "For Publicis, a transaction was expected -- just not this one," Mr. Wieser said.

Omnicom shareholders were caught off guard, Mr. Wieser said, because the holding company had previously argued it did not need more scale and had built up a base of shareholders who valued predictability and stability.

"The degree to which Omnicom's earnings were both relatively smooth and predictable in comparison to many of its peers allowed them to help cultivate an investor base and an analyst community that didn't really get under the hood very much" of the company or industry, Mr. Wieser said.

Mr. Wieser puts it bluntly: "The market basically puked on this deal because they didn't understand it and they didn't accept it." He thinks investors are ignoring long-term benefits.

So where from here? "I would not be surprised if maybe investors warm up to it a little bit as the management teams fine-tune their articulation of the deal," Mr. Wieser said. In the short term, and barring a major account loss, he said, shares are more likely than not to follow the general moves of the stock market.

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