Its unravelling was as fast and as surprising as its announcement: the $35bn Publicis-Omnicom merger – the biggest deal in the history of advertising – is off, it emerged this morning.
Without doubt the biggest – and most unexpected – M&A story of last year when it was announced nine months ago, the deal now suddenly lies in ruins.
So what happened, and why? Everyone assumed that if the proposed merger were to be called off, it would be down to anti-trust and regulatory rulings or even shareholder discontent. Yet neither of these things scuppered the deal. It was, it seems, the inability to agree on roles and a lack of time.
Both parties blamed the collapse on "difficulties in completing the transaction within a reasonable timeframe", as an Omnicom statement put it last night (although there have also been rumours that relations between senior management teams have been frayed of late, with the question of who would take the vital role of CFO proving particularly contentious).
"The parties have released each other from all obligations with respect to the proposed transaction, and no termination fees will be payable by either party," the statement said. A $500m termination fee would have applied if either company had walked away unilaterally – although the deal would have cost both Publicis and Omnicom a great deal of money already. Omnicom alone has spent over $48m on it, according to its company filings.
Publicis boss Maurice Levy hinted in his statement that his company’s costs were piling up too, and that the longer the process dragged on (these mega-mergers can last for years), the more it would cost, and the more distracted Publicis would become.
"The decision to discontinue the process was neither pleasant nor an easy one to make, but it was a necessary one," Levy said in his statement. "Prolonging the situation could have led to the diversion of the Group's management from its principal function: to best serve our clients."
And this is perhaps the nub of the matter: for both parties, the merger would have so taxed resources and management time that the core business of client work would have suffered. The beast resulting from the merger woud have been a giant, but it would most likely have been an exhausted – or even enfeebled – one.
Critics of the merger when it was first announced voiced doubts as to whether clients would be happy dealing with such a massive entity, which would have many client conflicts; that it would cause internal rifts; that top talent would leave; that there would be tax issues and that it was a marriage of two incompatible souls.
And what of the fallout? Most immediately, Omnicom shares fell $1.80, or 2.7 per cent, to $64.40 in after-hours trading last night (US time) after word leaked out that the deal was dead, pushing the stock back below the price where it traded before the merger was announced last July ($65.11).
Clients (as well as analysts, the media and the vast majority of employees – even senior managers, at both companies) seemed to have been caught completely off-guard, just as they were when the deal was first announced.
However – and this is why hindsight is such a wonderful thing – recent comments from both Levy and Omnicom’s John Wren had suggested that the deal could fall apart. On April 17, Levy said during a presentation of first quarter results that he was "confident the deal will go through". But he also added: "I would like to stress that Publicis has a very clear strategy with strong objectives and a strong position and I do believe we are the best holding company in our sector for the future, bar none. There is no issue if we go back to a standalone company. Life is good for Publicis whatever happens."
The following week, when announcing Omnicom results, Wren laid out the tax and regulatory issues holding up the deal. "There is no Plan B," he said. "Those things are requirements to get to the closing."
Both CEOs are now sure to face questions from shareholders over their strategy. Wall Street and the City never seemed to fully buy into the deal. The companies held four press conferences to explain its merits and yet their stocks never took off in the wake of the announcement. The proposed $500m in savings was viewed as small given the size of the tie-up, although many observers thought that the merged entity’s enormous media buying power would have bought huge savings for “Publicom” clients going forward. And the merged company would have the heft to see off – or at least compete with – the threats posed to their business from Silicon Valley giants like Google and Facebook.
Worse still, the toing and froing will not have instilled confidence on Wall Street or among both companies' big global clients. I feel that in the medium to long terms, both agency groups will be just fine, but they may be in for a rough patch, and senior heads may roll. Both groups (and their shareholders) will likely lose their appetite for mergers and acquisitions activity for the time being, but neither can afford to lick their wounds or be too cautious for too long, lest they start falling too far behind – especially Omnicom, which is seen as being “light” in digital. A swashbuckling dealmaker like Maurice Levy is unlikely to stay quiet for long – if the question of the 72-year-old’s retirement (enforced or otherwise) doesn’t come up.
But one person who will definitely be celebrating today is WPP’s CEO Sir Martin Sorrell. Not only has his group retained its crown as the world’s biggest advertising and marcomms network, but his decision not to be panicked into seeking a mega-merger or buyout of his own (IPG was a target many commentators mooted), instead continuing to pursue a strategy of organic growth, has been proved absolutely correct.
But then again, Sir Martin is probably adland’s most astute operator, and at a macro level at least, he is rarely wrong. In an interview with US trade paper Advertising Age this morning, he said he was unsurprised by the merger’s collapse.
“I don't think it was a surprise. It was probably somewhat surprising that it came so quickly,” he said, adding that he thought the merger would be beset with “clunky structures and regulatory issues". He added: "It caused strains with clients and with people internally. All of that comes to pass. Their eyes were bigger than their tummy.”
In other words, while it looked impressive on paper, it was just too big to work in the real world.
So does this mean that there will be no more mergers – or proposed mergers – of this scale? For the time being, at least – but the pressure on agencies from global clients to cut costs will continue, and consolidation is one way of dealing with this. Large-scale mergers will have to be planned with military precision and have clear strategic goals, otherwise they will fail. Vanity, sentiment, or a desire to be “the biggest” won’t convince anyone.
I’ll leave you with a parting thought: shares in WPP and IPG have climbed 8.7 per cent and 10.0 per cent, respectively, since Publicis and Omnicom announced their proposed merger last July. Perhaps the merger was always doomed to fail, because hardly anyone believed in it.
Once the dust clears, I’m sure this is a subject we’ll return to.
Tony Walford is a partner at Green Square, corporate finance advisors to the media and marketing sector.