A Mega-mess for Ad Agency Mega-Mergers
As one might recall, last summer Omnicom Group Inc. (OMC) and Publicis Groupe SA (PUB.FR) announced a $35 billion merger that would create the largest advertising company in the world. The announcement of this megamerger was perceived as an attempt to compete with Big Data players like Google and Facebook. However, nine months later, disputes between companies continue to delay closing the deal. In a recent article in the Wall Street Journal, “Clashes Over Power Threaten $35 Billion Ad Agency Merger,” Suzanne Vranica and Ruth Bender report that the delay is due to 1) approval from tax authorities 2) resolving who will be the acquirer in the deal and 3) who will take the seats of top executive positions. Nevertheless, even though these issues may be resolved, are disputes this far after announcing the merger a sign that the two ad agencies are better off on their own?
Taxes
To make a complex deal more complex, it has been reported that the deal will have the new company incorporated in the Netherlands, reside in the U.K., and have operational headquarters in both Paris and New York. The benefit of the new structure is tax savings of $80 million. The decision to be resident in the U.K. is a move to take advantage of low corporate taxes – currently at 21% – while being registered as a Dutch legal entity. The delay has to do with gaining approval from tax authorities in France, the Netherlands, and in the U.K. What is odd is that a company is typically resident where its management operates. The proposed deal, however, creates a “separate but equal” operational structure to be split between the U.S. and France. So, is a twisted deal structure worth the $80 million annual tax savings? Maybe, if it weren’t for other problems.
American or French?
The other dispute is deciding on who will be the acquirer. The deal was meant to be a “merger of equals” so that each shareholder would receive 50% equity of the other company and both CEOs, Maurice Lévy of Publicis and John Wren of Omnicom, would share the role of Chief Executive for 30 months after closing the deal. For accounting purposes, though, there must be an acquirer. So far, an agreement has not been made. Perhaps a French company would make sense, since it would be closer to their U.K. residency. Or, maybe it should be American because Omnicom brings in more revenue – $14.5 billion in 2013, while Publicis brought in $9.5 billion. Either way, the fact that this has become a dispute questions the nature of this “merger of equals.”
Minor Details
Finally, for some reason, deciding on who would be the CFO was not part of the conversation when Mr. Lévy and Mr. Wren shook hands last summer in Paris. There are some details that can be worked out later and others that must be clearly defined before agreeing on a merger. To agree without considering executive positions is like betting on a racecar without a driver. If they didn’t discuss executive positions, then what were they agreeing to? Needless to say, this issue is affecting relations between companies.
In close, the Omnicom Publicis Groupe megamerger is a great example of why making a complex deal structure without first considering key decisions can be a recipe for trouble. If they can’t agree on merging management, then maybe merging companies isn’t the best solution, even if it seems like the best way to compete against big competitors. I’m not convinced that a trans-Atlantic merger is the key to competing with Google and Facebook. Sometimes bigger isn’t necessarily better.
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