Tax and regulatory hurdles also created delays, leaving shareholders, employees and customers in limbo, the chief executive officers of New York-based Omnicom and Paris-based Publicis each said today. Both companies’ boards voted unanimously to end the transaction, with no termination fees.
“We are divorcing before getting married,” Publicis Chairman and CEO Maurice Levy said today on a conference call. “We were not totally in agreement, to put it mildly, on how to share the responsibility.”
The all-stock deal, billed as a merger of equals, would have created a company with $23 billion in revenue and more financial resources to invest in new advertising technology. Ownership was to be split down the middle for the two sets of shareholders, and the CEOs would have jointly run the combined entity, they said when the transaction was announced in July.
While the companies had said the merger would take about six months to complete, the plans bogged down when the boards couldn’t agree on key management roles, such as who would appoint the chief financial officer.
“We underestimated the cultural differences, and if I had the answer I would have brought it up,” Omnicom CEO John Wren said. “It will be a very long time before I try to do a merger of equals again.”
Delays were increasing daily, which led to higher risks for a deal that was otherwise a “superb idea,” Levy said. The combination wouldn’t have achieved the benefits the companies planned, Levy said. Publicis isn’t exploring any other large acquisitions, he said.
“We lost momentum,” Levy said. “It’s disappointing we had this dream which is not going through.”
There were warning signs the deal was in trouble. On an April 22 conference call, Wren said the transaction was moving slower than anticipated, citing the complexity of regulatory approvals, including tax decisions in Europe. The companies had also been waiting for antitrust approval in China.
The companies should have more carefully examined the tax implications of the deal long before announcing the transaction, said Rich Tullo, director of research at Albert Fried & Co. in New York.
“You don’t worry about taxes after signing a deal to merge two $16 billion companies,” he said today in a research note. “That’s basic due diligence.”
Omnicom has been losing creative employees, and Wren’s job could be at stake for failing to complete the merger, Tullo said.
Shares of Omnicom had fallen 11 percent from a February high on speculation the transaction was in jeopardy. They rose 2.2 percent to $67.66 at the close today. Publicis has dropped 13 percent from a peak in February and closed down 0.8 percent at 60.20 euros in Paris today.
While the companies had cited cost savings as one benefit for the merger, they were also pooling assets to contend with the sweeping changes digital advertising has brought to the industry, with its focus on precise measurements and automated purchases. It’s doubtful that the transaction would have made much difference for either of the companies, which now have to face those challenges alone, said Peter Stabler, an analyst at Wells Fargo & Co.
U.S. advertising revenue is forecast to increase 6 percent to $168 billion this year, according to research released by Magna Global in April. Digital media advertising revenue, which grew 17 percent last year, is projected to pass television by 2018. In December, Magna projected global industry growth of 6.5 percent in 2014, to $521.6 billion.
Publicis, the third-largest advertising firm, owns Saatchi & Saatchi and Leo Burnett, and offered digital assets including Digitas, LBi International and Razorfish, as well as strength in emerging markets. Omnicom ranks second and is strongest in the U.S., with agencies including BBDO and TBWA.
“We expect both Publicis and Omnicom to suggest that neither company has been materially harmed by the nine months of merger-related activity, and that the competitiveness of both assets remain strong,” Stabler said in a note today. “We’d agree and believe that the cancellation removes a major distraction on both sides.”
The failed merger won’t slow down consolidation in the advertising industry, said Martin Sorrell, CEO of London-based WPP Plc (WPP), which will now remain the largest ad company worldwide. Japan’s Dentsu Inc. may bid for Interpublic Group of Cos. while Havas SA could be a target for Vivendi SA, Sorrell said in an interview today.
Publicis may seek out Interpublic, while Havas and Dentsu are also likely to seek acquisitions, said Brian Wieser, an analyst at Pivotal Research in New York. Omnicom and WPP would probably seek to stand pat, he said.
“Further consolidation is still likely, but specific shapes and timing are uncertain,” Wieser said. “Most paths lead towards an Interpublic acquisition, but then such an outcome was likely to happen previously.”
Havas, a smaller French rival partly owned by billionaire Vincent Bollore, said in a statement that its scale allows the company to “adapt more efficiently to the new environment of the communications industry.”
Shusaku Kannan, a spokesman for Dentsu, said the company’s integration with London-based Aegis Group Plc, which it bought last year, is progressing smoothly and has added clients to its global portfolio.
Omnicom isn’t looking at any large acquisitions, Wren said. No key employees or client accounts defected during the merger process, he said. The company wrote to key clients last night to inform them of the decision to end the merger with Publicis.
“Responses were very positive from clients,” he said. “They recognize it’s better to do what we did than enter into a bad marriage.”
Still, WPP’s Sorrell said his company had begun to pick up clients and executives from the two rivals.
“Levy exercised his charm and seduced Wren into a transaction under the Arc de Triomphe,” Sorrell said. “The motions of this were more emotional than rational to knock WPP off its perch.”