Fallout from the Publicis/Omnicom merger

July 29, 2013

Richard PinderBy Richard Pinder

When first hearing the Publicis and Omnicom merger rumours you could have been forgiven for thinking it to be some silly season gossip.

But as we know POG is not a passing fancy, it is for real. Hats off to Maurice Levy who has consistently shown his ability to be daring, decisive and dynamic just when people least expect it.

So what drove it? And who are the winners and losers? First, two sets of observations:

The announcement was made in Paris, not New York. The Group will be called the Publicis Omnicom Group, not the Omnicom Publicis Group. The revenues of Publicis Groupe are some way below those of Omnicom Group though their market caps are much closer, but it will be a merger 50/50 owned by the two companies shareholders.
After the dust has settled and the merger is done, the silly co-CEO thing is finished with and the company starts to operate normally, the CEO will be John Wren, from Omnicom, the CFO likely to be Randy Weisenberger from Omnicom, the ticker marker on the NYSE will be OMC and largest market for the combined entity will be the USA.

Once the incredulity subsides, you can see the attraction to Maurice and John. And as the above simple summary shows, you can see the game that is being played by both to get the other to agree to the deal. The former gets to show the French establishment what world class really means, a brilliant retirement gig as non executive Chairman of the world’s number one advertising group and without having to go through with the charade of making good his oft delivered promise to Jean-Yves Naouri to be his successor. The latter, within 30 months, gets to run something nearly double the size of OMC today, in seriously good shape in Digital and Emerging Markets, the number one ad agency of the number one spending client in the world – P&G who had only just taken most of their business from OMC – and all without the pain and risk of taking the long road there.

For Elisabeth Badinter it’s a fabulous end to her tenure as Chair of Publicis – seeing the company her father founded in 1926 become number one globally, as well as securing the very strong valuation on her holding that today’s Publicis stock price provides. For a number of senior managers there will likely be the triggering of various unvested options, stock grants and other goodies, not to mention the special dividends, that will mean good will all round. So, off on the August vacances with a spring in their step? Well not everyone…

For a start there is precious little in the announcement about WHY this is better for clients. We can see it’s better for doing deals with the big media partners, old and new. Scale counts there. But when the bulk of the enterprise’s activity is still about finding, creating and executing inspirational ideas to motivate the world’s population to choose one brand over another brand, there is a point beyond which scale can actually be a disadvantage – talent feels lost, ideas get killed by people who have no idea what the clients’ needs are and everything takes too long and costs too much. Well that’s what a large number of large clients have been telling me this past two years since I left Paris as COO of Publicis Worldwide.

There is also the small matter of the $500m savings mooted in the announcement. Publicis Groupe runs lean. Margins are already industry best. So the chances of finding much of the savings there seem slim. It will be interesting to see how the board of BBDO reacts to the likely loss of their top tier international travel rights, or the agencies of DDB cope with tough bonus rules that tie every unit in the company to the performance of those around them, as happens at Leo Burnett or Publicis today.

As a footnote on the winners and losers, spare a thought for those who fought, lost and thought they had won in the long-running soap opera called Maurice Levy’s succession. Just as the game looked like it would soon be over, the sport got changed and everything was different.

It will also be fascinating to see what WPP do about this. They have got used to being the world’s largest and Sir Martin is rarely quiet for long on any topic, let alone one so close to home. Bookies will surely be giving poor odds on a shotgun WPP/IPG or WPP/Havas union.

And me? Well as client choice reduces, the need for new global alternatives will continue to increase. It’s why we started The House Worldwide and it’s why we think it will  be increasingly relevant to clients who want to get back to a world where the client and the brand are more important than the agent promoting it, and where the money is better off going to the talent than to the accountants counting it.

Bigger and smaller, that’s the future of the ad network game.

Richard Pinder is co-founder and CEO of The House International. He was formerly the head of Publicis Worldwide.

 

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Age cannot wither them, nor shareholders vote them off the holding company board

April 16, 2013

David-Jones---Havas-007Whoever said advertising was a young person’s business? The conventional wisdom is that at 40, most ad executives would be advised to investigate a second career. And at 50, they’ll be positively clapped out and  have “post-economic” freedom foisted upon them whether they like it or not.

Superficially, membership statistics for the Institute of Practitioners of Advertisers (IPA – the UK adman’s trade body) bear this theory out. When I last looked (which was admittedly a while ago, but I doubt the demographic profile has improved), the number of members surviving their 50th birthday was a vanishingly small 6%.

But these are just the worker bees. Look at the nerve centre of the hive – the main board of the world’s leading advertising holding companies – and you’ll find that gerontocracy has never had it so good.

I was forcibly reminded of this the other day by Marketing Services Financial Intelligence editor Bob Willott.

Willott has done a demographic survey of the Omnicom main board and found the average age to be an astonishing 70. In his own words:

The oldest of the 13 board members is the chairman and former chief executive officer Bruce Crawford.  He is 84 and has been a director for 24 years. His successor as CEO John Wren is a sprightly 60 and has served on the board for 20 years.

I have yet to do the arithmetic upon the board composition of other global holding companies, but the most superficial of surveys suggests a similar age-profile, if their chief executives are anything to go by. At WPP Group, there is an evergreen Sir Martin Sorrell – still incontrovertibly ruling the roost at 68; and likely to do so for a good while yet unless shareholders go nuclear over his annual pay review. Interpublic Group chairman and CEO Michael Roth sails imperturbably on at 67, despite repeated attempts by the media to unseat him or sell his company to a rival. And at Publicis Groupe we have the grand-daddy of them all Maurice Lévy – 71 – with no successor in sight, despite repeated attempts to pretend he has found one.

All this looks terribly good for that comparative whipper-snapper, David Jones (pictured above). At only 46, the global CEO of Havas can anticipate at least another 25 years at the helm.


£1.7bn global ad review is creative solution to Johnson & Johnson’s money problem

July 25, 2012

It would be nice to think that Johnson & Johnson’s newly announced review of its £1.7bn annual advertising spend was driven by a need for greater creative consistency. But it isn’t.

Money’s the thing – saving it that is. J&J may be one of the world’s biggest brands, but it’s also a company in trouble. Since 2009 J&J has suffered numerous recalls in the US, mainly of its over-the-counter drugs like Tylenol and Benadryl; but the prescription and medical devices businesses have also been hard hit. All in all, it’s said to have lost $1bn in sales, partly through bad luck and mostly through sheer incompetence.

At first it was the staff – including the marketing department – who paid, by being made surplus to requirements. Now it is the spend that’s being trimmed. Judge for yourself from the officialspeak: “Johnson & Johnson is conducting a global agency review and consolidation to build greater value and deliver innovative and fully integrated solutions for our consumer brands.” Well, they wouldn’t want less innovative solutions would they? And they could hardly be less fully integrated than they are at the moment.

In truth, there’s an easy win here for the new kid on the block, Michael Sneed – who became J&J’s top marketing (and PR) officer at the beginning of this year. There could hardly be a less efficient way of running your global marketing services than the one that exists at the moment. Uncle Tom Cobbleigh and All are at the advertising trough. It would be simpler to name a global marcoms group that isn’t on the roster.

WPP has business through JWT and AKQA; Publicis Groupe through Razorfish; Interpublic through Deutsch, Lowe, The Martin Agency and R/GA; Omnicom through DDB and BBDO; and Havas through Euro RSCG. That leaves, er, Dentsu and MDC off the list.

Sneed is a company lifer who, at various stages of his J&J career, has shown considerable sensitivity towards advertising creativity. It will be interesting to see whether this natural instinct gets overridden by the all-powerful imperative of saving the company money. Don’t expect a self-aggrandising Ewanick moment – Sneed seems too modest for that. Do expect a financial deal, of the “Team WPP” or more likely “Commonwealth” variety, that dresses up financial expediency as a coherent creative solution.

The most interesting thing about this review may be the losers. If Interpublic is among them, perhaps group CEO Michael Roth will at last seek to do a deal with Publicis Groupe. The air is certainly thick with rumours to that effect at the moment.


Havas figures that simply don’t add up

November 2, 2011

Here’s an arithmetical problem for City analysts. Why don’t marketing services group Havas’ splendid Quarter 3 figures actually add up properly?

First, a bit of background. Agency holding company performance has continued in strong recovery mode, despite the rest of the world economy going to blazes. Organic growth, which is seen as the purest underlying growth indicator because it strips out acquisitions, has been particularly vigorous at Aegis, which has just reported a Q3 surge of over 11%. But Interpublic, Publicis Groupe and Omnicom have all reported sparkling figures, with WPP trailing among the big boys on a still respectable 4.9%.

Havas delivered its best quarterly sales in 3 years, beating analysts expectations, with a sterling like-for-like (ie organic) growth rate of 7.3%, thanks to strong performance in North America, Asia and Latin America. Not unnaturally, the Havas share price surged on publication of these figures.

I have no doubt that Havas did indeed perform very well. The trouble is, the regional figures broken out in Havas’ own analysis, when added up and averaged, don’t hit 7.3%. They reach nearly 6.4%.

Let’s get technical for a moment. The method used, so far as I know, by all parent companies for arriving at a global organic growth figure is to multiply the share of each region by that region’s growth rate and then add up the resulting figures to give a global total.

In Havas’ case the declared figures are as follows. Europe, 51.6% (ie 0.516 of the whole), growing at 1.8%, gives us a figure of 0.93%; North America, 34.5% at 8.2%, gives us 2.83%; and Rest of World, 13.9% at 18.7%, gives us 2.6%. Now add up 0.93%, 2.83% and 2.6%. You get 6.36%, which rounds up to 6.4%.

Not 7.3%. Which is quite a difference when it comes to investors assessing the future performance of a company and making their bets accordingly.

My question is: where has the rest of Havas’ growth come from? Answers in my mailbox please.


Is Ipsos poised to buy Synovate from Aegis for €550m?

May 20, 2011

A rather interesting rumour is doing the rounds of the City. And it is this: Aegis, the media buying group, is about to divest its market research operation, Synovate, for a princely €550m (£481m). The lucky recipient? Paris-based global market research empire Ipsos.

While I have no idea whether any deal will go through, let’s say it’s not a surprise that the two parties should be talking. After all, we’ve been here before – or at least, somewhere very nearby.

Back in 2009, Aegis launched a formal strategic review to determine whether or not to sell Synovate. At the time, GfK was felt to be the most likely buyer. GfK – privately held but the world’s fourth largest MR group even so – was still smarting after it came off second best to WPP in the acrimonious £1.1bn bid battle for Taylor Nelson Sofres.

But it might just as well have been Ipsos, the fifth largest, that was doing the talking. Both MR groups are in the grip of the same strategic imperative: they need to grow bigger in the wake of the 2008 TNS deal, which catapulted WPP to near top position in the world market research league table, just behind Nielsen. The consolidation question is not a ‘whether’ but a ‘when’.

What’s more we know the Ipsos management team admires Synovate and believes it would be a good fit. Don’t just take my word for it. In late 2005 Ipsos’ chairman and chief executive Didier Truchot publicly described Synovate as “a very nice and dynamic organisation.”  Of course, he didn’t go so far as to say he would actually buy it. Then again, he didn’t say he wouldn’t. He merely pointed out that it was “a little too early” to entertain such a possibility.

Truchot was at it again in 2009, when announcing a robust set of results for the previous year: he danced around the idea of buying Synovate without actually saying it.

Perhaps five-and-a-half years has proved long enough to mature his plan.

All of which does little to shed light on Aegis’ motives for selling the business, if that is what it is doing.

Admittedly, the market research division is currently an underperformer. In the latest, Quarter 1, financial results, the Media division turned in an impressive 10.1% improvement in sales, well ahead of the 7% analysts had been expecting. Synovate, on the other hand, undershot, if only by a small amount.

Furthermore, divestment would provide more ammunition in the war-chest. Aegis chief executive Jerry Buhlmann has already embarked on a strategy of shoring up Aegis’ position as a pure-player global media buyer with the £200m acquisition of Mitchell Communications.

But there is a wild card in all of this. What of 27% Aegis stakeholder Vincent Bolloré? Despite his very public disavowals of any further interest in a takeover, Aegis would surely become more, not less, tempting as a target. After all, what Havas – of which he is president and the principal shareholder – most needs is a more effective media buying operation.

UPDATE 6/6/11: Evidently the rumour was true: Aegis has just confirmed it. What matters, now the veil of secrecy has been stripped from the talks, is whether Ipsos is allowed a clear run at the acquisition. Or will others, such as Publicis Groupe, barge in with better terms? Anyone interested in the financials (Ipsos is about twice the size of Synovate) might care to look at Bob Willott’s newsletter on the subject.


UK marketing managers should sip from the glass half-full

April 29, 2011

Curiouser and curiouser. Almost all the big battalions in marketing services have now reported their Quarter One financial results. Without exception they mirror the upbeat performance curve of Omnicom, the first out last week. Which is in bizarre contra-distinction to the gloomy outpouring of the Bellwether Report I commented on earlier.

No need for too much fact-grubbing here. Just look at the organic growth of the big agency groups. Publicis Groupe (6.5%), Havas (6.8%) and WPP (6.7%) easily coasted past Omnicom’s already impressive 5.2% global figure. Only Interpublic lagged – and even so achieved a creditable upturn of nearly 5%.

So what, you say? All this shows is a startling outperformance in emerging economies such as China, India and those of Latin America. Which is concealing lacklustre results in doldrums Europe – and particularly the UK.

Not exactly. True, the emerging markets are flattering overall performance. But when you look at the UK, you wouldn’t believe the economy is flat-lining at all. While no one else has achieved Omnicom’s astonishing UK organic growth rate of 9%, the general results are pretty impressive. At the bottom were Publicis, with 2.4%, and Havas (2.5%). Much more significant was WPP’s performance. WPP, now the world’s largest marketing services group, still derives 12% of its global revenue from the UK and managed to extract 7.7% organic growth. What’s more WPP chief Sir Martin Sorrell is cautiously optimistic about the prospects for 2011 and 2012. A more reliable index of Sorrell’s growing confidence is the fact that he has slipped the self-imposed £100m corset off WPP acquisitions; although he does caution the next one will “only” be about £200m. That is, the size of last year’s biggest – Mitchell Communications, which was acquired by Aegis Group.

So what’s with the Bellwether’s pessimism? UK marketing managers really should sip the glass half-full. There’s every reason to suppose it won’t poison them.


Will Ofcom media-buying probe lift the lid on a can of worms?

April 6, 2011

Good luck to Ofcom as it attempts to prise the lid off the £3.5bn TV media-buying market and explore the wriggling multi-form life within. It really is a can of worms, and one most people in the business, most of the time, would prefer to keep firmly closed.

Their motives differ. Clients, despite the high-minded calls coming from their trade body ISBA for greater industry transparency, tend to find the subject stultifyingly boring. One indefensible reason for this is their personal unwillingness, or inability, to grasp the Byzantine complexities of the trading system. You might as well ask them to brush up their Latin as describe in detail the iniquities of media-owner  rebates. More pragmatically, they argue they have better things to do with their time – such as steering the strategy of their brands. Media negotiation is a matter for experts (on all sides) who understand the language, is it not? All you need to do is put a lesser amount on the table every year, screw down the terms with your agency even further, and get an auditor to establish that, at the year end, you have achieved still greater value for money (spuriously expressed in “media currency”  terms, not ROI) than the year before. If you haven’t, well maybe it’s time to fire your agency.

Media owners and agencies, on the other hand, are intimately aware of distortions in the system caused by such recondite issues as “pooled buying”, “agency deals” and “rebates”. And so they should be: these distortions, and the cloud-cover (or lack of transparency to the outsider and the regulator) that accompanies them, are what allow them to game the system.

Would a more open system be more effective than the present regime, for all its imperfections? Not necessarily. Better regulation does not inexorably lead to better business.

The fundamental criticism of the current system is that ads/spots end up going to the media owner who offers the best agency incentive rather the best fit for the client’s brand. The fundamental problem facing any reformer attempting to redress the balance is agency remuneration.

It might seem that media-buying agencies are in an incredibly powerful position. Indeed, in some ways they are. Ten buyers owned by six international agency groups – WPP, Publicis Groupe, Omnicom, IPG, Aegis and Havas – are responsible for about 80% of the money spent on UK commercial television. A comparable oligopoly dominates press, magazine and (under the guise of agency specialists), outdoor buying. The concentration of their market power is now, arguably, greater than that of the clients they serve, or the media owners they negotiate with.

Not surprisingly, these media buying groups are critical to the profitability of the agency groups that own them. As a recent article in The Guardian pointed out, something like £43bn a year passes through WPP alone (admittedly the largest global operator) on its way to media owners – which is more than the GDP of Ecuador. The treasury and cash-flow advantages cannot be overestimated. Equally, let’s not forget profitability. A media buying house on song has an operating margin of up to 25% which, given the scale of its operations, makes it the single most important component in any of the big agency groups.

But with power comes a surprising vulnerability. When agency network bosses promise their shareholders – as they do every year – enhanced performance, the first place they come looking for it is in their media-buying cash cows. Yet that profitability is built on foundations of sand. The days of 5% commission are long since gone; the equivalent of 2-2.5% would now be nearer the mark, as client procurement tightens the noose. And then there are complications, like a part of the deal being based on payment by results. The net result is greater reliance on financial compensation from the media owner: in effect, the use or abuse of market power to screw down the ratecard.

Most notorious of these Spanish practices is the discount, and the easiest way of looking at how it operates is with national newspapers. Agency media buyers are bonused on achieving a set reduction (10% for argument’s sake) not from the ratecard itself, but from the per page mean figure of all titles established in the last audit. Clearly it’s easier to negotiate a discount with a weaker player. The danger, from the client’s point of view, is that the ad ends up not in the title with the best audience profile or which boasts the most robust circulation, but in the title that has offered the best deal to the media buyer (which then collects its bonus). This market distortion has an ironic multiplying effect, given that most national newspapers are in the grip of structural circulation decline: the strong get punished, while the weak get weaker.

Murkier still is the incentive, a media-owner inducement which is often offered in addition to the negotiated discount. It may come in the form of cash, or free insertions/airtime. Strictly speaking, it should be remitted to the client, although that is far from always the case. Airtime barter may be illegal in the UK, but it is often difficult to audit who has used this extra airtime/pagination and for what purpose. An extreme example of what can go wrong when the client and senior agency management let their eye slide off the ball is provided by the Aleksander Ruzicka affair. Ruzicka was the president of Aegis’ German operation; but he is now spending 11 years in jail. The reason? He and several co-conspirators clandestinely siphoned TV airtime credits, which should have been remitted to the client Danone, into their own television sales house – where they were sold on for their own profit.

However, many clients are milder than Danone, which eventually decided to extract its pound of flesh in court: they simply take the view that incentives are a perk of the job, and would rather not know what is going on. They are not necessarily wrong to do so. As long as the system broadly delivers value, why worry about its flaws? Besides, it’s often difficult to determine the difference between what, from a media owner’s perspective, is simply a “loyalty payment” lubricating the wheels of business and an unvarnished bribe. The belief seems to be that the auditing system will expose any systematic skew in buying behaviour, and therefore acts as an effective suppressant of corruption.

As it happens, Ofcom’s terms of reference do not seem to encompass the principle of the discount. Siobhan Walsh, who is leading the 6-month investigation, will instead concentrate on whether pooled buying by the big operators (“share deals”) restricts choice for planners (who select the best audience profile for their client) and shuts out the smaller buying specialist.

The danger is that the investigation finds sufficient cause for concern to warrant involving the Competition Commission. Who knows what worms will crawl out if the CC launches a full TV ad market review? Nor, I suspect, will the repercussions be restricted to the TV market.


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