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.

 

Advertisements


Why McCann’s Lee Daley wants his life back

July 6, 2011

Sad to see, if not entirely surprising, McCann Erickson Worldwide chief strategy officer Lee Daley throwing in the towel. Few people can have worked harder at Mission Impossible.

It’s important to note that at the time of Daley’s return to IPG-owned McCann, as chief strategist EMEA, in 2009, the troubled leviathan was under a very different leadership: that of ageing patriarch John Dooner.

Dooner was due for retirement, as he himself cheerfully admitted. The question was, who would succeed him? The most obvious candidates were Brett Gosper, CEO of McCann EMEA, Eric Keshin, the network’s COO, and Mark Dowley, network creative content and entertainment chief. Though popular in varying degrees, these candidates were also divisive. Enter Daley as a potential compromise candidate. He was an old McCann hand, having first joined the London office in 1990 where he rose meteorically to board director level. But he also had wider managerial experience in a variety of rival organisations. In 2001 his career began an odyssey which took him, successively, to WPP as worldwide CEO of Red Cell (later United), group chairman and CEO of Saatchi & Saatchi’s London office and eventually (if briefly) to Manchester United as commercial director.

IPG chairman and chief executive Michael Roth did indeed have a compromise candidate in mind, but it was not Daley. The man who seized the crown in early 2010 was Nick Brien, worldwide CEO of Mediabrands – who had done a sterling job of restructuring IPG’s ailing mediabuying behemoths Universal McCann and Initiative.

Since  when Brien has barely paused for breath in applying the age-old maxim ‘a new broom sweeps clean’. Keshin and Gosper have headed for the exit (though Dowley, I believe, remains).

Daley, in the meantime, was promoted to the network’s global leadership team and his present role – a consolation prize of sorts. Some consolation. In his lengthy resignation letter, reproduced in Ad Age, he makes it clear he hadn’t exactly landed on a bed of roses. The brief was to shore up McCann’s crumbling core clients, GM, Nestlé and L’Oréal. No time for the more rewarding task of pursuing new business – just 80 hours a week in an aeroplane relentlessly circumnavigating the globe in an effort to defuse one client crisis after another.

No wonder he gave up. Anyone would, in the circumstances.


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.


Sorrell prepares us for some tough LUV

July 29, 2010

Takeover activity (see Mitchell story below) is not the only indication the ad economy is on the mend. Publicis Groupe has just delivered what can only be described as a cracking set of second quarter figures.

Among the highlights was organic revenue growth of 7.1%, a further improvement from the 3.1% posted in Q1. Organic growth is regarded as one of the purest metrics of growth or decline, because it strips out such things as currency fluctuations and acquisitions.

More importantly, perhaps, a bullish performance emboldened Publicis Groupe chief Maurice Lévy to stick his neck out with this bold assertion of global recovery:

“Even if we don’t know for sure that the crisis is over and despite some worries about sovereign debt and public spending, there is a strong feeling that we have reached the end of the crisis.”

Let’s hope Lévy is right. IPG’s own set of quarterly figures, out today – which reveal similarly strong organic growth (admittedly from a lower base) – give grounds for optimism. But Lévy’s bullishness has left at least one of his rivals frankly incredulous. Don’t expect the same enthusiasm to suffuse WPP’s half-year figures when they come out on August 27th. LUV, I gather, is in the air, but it will be tough LUV.


Ask not what I can do for my company, ask what my company can do for me

May 13, 2010

Let’s face it, no one ever went into advertising to remain poor: the extravagant severance payments awarded to top executives by compliant remuneration committees in London, Paris and New York are the stuff of legend. But, as RBS’ Fred the Shred discovered, being filthy rich isn’t much fun if you end up a pariah. The context of gain matters.

John Dooner, latterly chief executive of McCann Worldgroup, recently retired from Interpublic Group with a pension of $37.7m. This extraordinarily generous provision was bolstered by payments made during his years as IPG group ceo – a position from which he stepped down in 2003. Had he actually done a good job in either of these roles, no one would have batted an eyelid. As it is, the IPG years were mired in scandal and the normally reliable McCann has been haemorrhaging major accounts. By any standards,  $37.7bn is a handsome reward for failure.

Unlike Dooner, Publicis Groupe chief executive Maurice Lévy deserves well of his company. He has made it a global force to be reckoned with, while Dooner has presided over decline. And he will duly be compensated  – with a financial package worth, perhaps, £30m when he retires. Nevertheless, it is unfortunate that the calculation of this generous severance payment involves factoring in, at the full measure, a phantom bonus payment he never awarded himself last year; in the midst of recession, he had made great play of sacrificing this self-same bonus as a token of socialist “solidarity” with the many staff whom he had had to make redundant or, at least, whose salaries he had slashed.

However, that is no more than a faux pas compared with the predicament John Wren, group ceo of Omnicom, is in. Wren stands accused of profiteering from cheap stock options while, all around him, his agencies withered on the vine and staff were put out on the street to help make corporate ends meet. The accusation comes from a maddened activist shareholder – investment manager David Poppe, of Ruane Cunniff & Goldfarb’s Sequoia Fund, a 1% owner of Omnicom stock. Poppe has sent a circular to other shareholders which alleges that a massive grant of 22 million stock options on March 31 2009, plus another 3.5 million awarded on the last day of 2008, enabled Wren and his senior management team to acquire 8% of the company at bargain basement prices. And there’s more. Poppe reckons it’s part of a pattern of behaviour stretching back a decade. He just stops short of accusing Wren of backdating these options, in order to achieve a favourably low exercise price; which is actually illegal.

The thing about options, of course, is that they are a gamble which can end up being worthless. But Wren, a former accountant, is a wily operator. With the stock market rallying, what was virtually valueless in 2008 has turned into pure gold. The result being that his 2009 annual “compensation”  shot up to $7.9m – compared with $2.9m the year before – according to SEC filings.

Wren should watch out. Fund manager activists have had surprising success in toppling the mighty. Remember David Herro, who was responsible for the nemesis of the Saatchi brothers back in the nineties?


%d bloggers like this: