Omnicom CEO John Wren — whose company owns BBDO, DDB, TBWA and other ad agency brands — made just under $15 million in compensation last year. His pay was roughly flat from the year before (see chart below).
He also got $157,000 in executive perks, of which $132,841was personal use of a private jet:
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A reported mega-merger between the advertising giants Omnicom and Publicis is unlikely because of regulatory concerns, experts have cautioned.
The pair were reported to be in “late stage” talks to create the world’s largest agency group with a market value of £20bn and bring agencies such as Publicis’ Saatchi & Saatchi and Omnicom’s BDDO under the same umbrella. The combination would control 41pc of global advertising spend and would be likely to attract close scrutiny from competition regulators around the world.
It would also raise significant conflicts of interest. Paris-headquartered Publicis counts Coca-Cola as a longstanding client, while New York-based Omnicom is responsible for Pepsi’s advertising, for instance.
In a further barrier to a merger, the Hollande government has a record of resisting deals that grant American companies influence over the country’s media industry. In May it blocked Yahoo!’s £500m bid for a controlling stake in the French video website DailyMotion.
Bloomberg said late on Friday that Publicis and Omnicom were planning a “merger of equals”, citing a source with knowledge of the talks. It said negotiations could still collapse.
The report quickly drew scepticism from the advertising world. David Jones, the chief executive of Havas, another Paris-based advertising group, joked that he “just saw a flying pig”.
Industry analysts also raised doubts, despite strong motivations for Publicis and Omicom to do a deal, including building scale in emerging markets.
“Our view is that such a transaction is unlikely to occur,” said Brian Wieser of Pivotal Research.
“Publicis is one of the most important multinational companies based in France, a country famously known for protecting national champions.”
“However, we would consider a combination of the entities as highly favoruable for the companies and the industry if they, in fact, decided to merge and regulatory authorities approved a deal.”
Omnicom and Publicis did not comment on the reported talks.
SEE ALSO: REPORT: Omnicom And Publicis Are In Talks To Merge
The Wall Street Journal reports that Omnicom and Publicis Groupe have agreed to merge:
Omnicom OMC and Publicis Groupe SA, the world's second- and third-biggest advertising companies, have agreed to merge, creating what would be a $35 billion behemoth, people familiar with the situation said.
The boards of both companies have approved the deal, the people said, which is expected to be announced Sunday in Paris, where Publicis is based. Publicis scheduled a news conference for 2 p.m. on Sunday for a "major corporate announcement."
We told you about the merger talks Friday.
Omnicom CEO John Wren and Publicis CEO Maurice Levy are expected to be co-CEOs, although Levy is nearing retirement. They've even picked a new name, the WSJ said: Publicis Omnicom Groupe. (Note the French "e" at the end. It will be interesting to see if that "e" survives in the long term.)
The combined entity would have $23 billion in revenues — far eclipsing WPP, the current largest agency holding company. It would also have lots and lost of client conflicts, most obviously Pepsi and Coke.
Publicis has sent out a press release for an 8 a.m. conference, Eastern Time. Here's the text:
I would like to invite you to a very important press briefing tomorrow, Sunday July 28 - at 2.00pm CET (8.00am ET) at Publicis Groupe for a major corporate announcement.
We encourage you to attend to hear from the principals in person and participate in a Q&A session.
Please let me know by email if you will be able to attend.
If you can’t attend in person, please use the dial in number below.
Location: Publicis Groupe building, 30 rue Vernet, 75008 Paris
Publicis and Omnicom just finished their first press conference announcing their merger, creating the world's largest ad agency holding company.
Here's the official announcement.
The merger is completely unexpected. It was thought that perhaps Publicis might acquire a smaller network, such as Interpublic, or merge with an Eastern rival like Dentsu. The new Publicis Omnicom Groupe will have $23 billion in revenues and a market cap of $35 billion. The new company will have 130,000 employees.
Publicis shareholders will receive a 1 euro special dividend, Omnicom holders will receive a $2 dividend.
Omnicom has scheduled another press event in New York for Monday at 8 a.m.
Here's our live coverage of today's event in Paris:
Publicis CEO Maurice Levy is speaking first, alternating between French and English. He begins by praising Omnicom CEO John Wren.
Now Omnicom CEO John Wren is speaking, in English, to the relief of this reporter. He says talks began six months ago. We were "pinching ourselves a bit and saying is this really possible? Can this really happen?"
"We had many opportunities to test whether we could trust each other or not."
"It is inconceivable that we could take these two great companies and make them greater." He gives credit to Levy for having the idea of the merger first.
Wren is talking about how this will be good for their staff.
It's good from a client's point of view too, he says.
In terms of making both companies' offerings complete, "This gives us the opportunity to accelerate those things."
"Anyone who is concerned about any of this should not be."
"We're going to create value and new opportunities."
Back to Levy, in English.
"It is a merger of equals. The name of the new company will be Publicis Omnicom Groupe, the split of ownership will be roughly 50-50."
"We will be doing this under the ticker symbol of OMC."
$35 billion in market cap.
"This is a new company for a new world."
"A new standard for our industry. Our ambition together is to create that new standard."
"Enhancing growth and optimizing synergies ... enhanced global footprint."
He talks about digital media giants like Google and Amazon: "We will be in a position to better partner with them." (That's about matching them in size at the negotiating table.)
"Revenue of roughly $23 billion."
"Net income of close to $2 billion."
"Tax free for shareholders: It will be holding company based in the Netherlands. We will keep our headquarters in New York and Paris. ... It will be listed on the New York stock exchange and in Paris."
They will be co-CEOs for 30 months then Levy will become chair. The board will have 7 people from each company. Both CEOs will also be on the 16-person board. "We have made a commitment to increase the gender differentiation to come to parity."
Merger is hoped to close at the end of this year.
Now Levy is speaking French again. (Ma francais est terrible, donc je ne sais pas q'est-ce il dire.)
Wren is much quieter at this conference. Perhaps that's because Levy can switch between French and English effortlessly. Wren hasn't spoken a word of French so far.
Wren finally says something in French: "Oui," and everyone laughs.
Questions!
Will you be distracted from work for clients?
Wren:"A bit presumptuous to think I wasn't supported by 70,000 unbelievably productive people."
Levy: There will be a transition team to handle the merger. "We are both very experienced at acquiring and merging. ... Obviously it is a different magnitude but we're not worried about that."
Will the French government block the merger to protect an iconic French company, and what other reg hurdles will there be?
Levy: We are a private company publicly traded but we are in private hands. ... We have informed all the officials yesterday evening and this morning. The reaction we got from everyone was a tremendous support. So we don't expect the French govt will have anything else than great support.
Wren: we count the countries as something between 41 and 46 that we have to get clearances from. ... there's a lot of competition out there at every level ... it's procedural. We don't anticipate anything overwhelming.
Both say they're confident they'll get approvals. "Swiftly and without major issues," Levy says.
Now there's a question and answer from Levy entirely in French.
CNBC asks about job cuts and WPP chief Martin Sorrell. Everyone laughs. (Levy and Sorrell don't like each other.)
Levy:"Martin Sorrell is a strong competitor, a very strong competitor, we respect WPP enormously. We do not define our strategy as regard to what he will think or what he will do. We define our strategy as what is good for our clients, our people and our shareholders."
"Is this a swan song? I don't know. I know when the swan is singing he is dying, so I prefer not think about this." [That's the quote of the day right there!]
Wren:"There's no planned job cuts through this. We're reviewing it as these integration committees come together. ... this wasn't done so we could go in and cut jobs. We wouldn't have done it if that was the only opportunity."
[Readers should note that the press release says they believes they can find $500 million in efficiencies in the merger. At agencies, the biggest operating cost is staff compensation, so it looks like there will be some layoffs.]
Another question in French, and Levy answers.
Wren: In terms of shared clients, there are $6.5 billion in revenues on the OMC side in 2012, he says. "We will have to make commercial decisions about, at some point but it's not overwhelming. Most clients have long since, we've handled the question of conflicts ... extraordinarily well. ... Do I expect it to alter materially anything? Absolutely not."
Wren takes a question in French and answers in English. Compensation will be performance based, he says.
[This French-English thing will be very interesting as the merger plays out. Levy is clearly comfortable in both languages. But on the American side, how many English-French speakers will there be?]
Bloomberg asks about the breakup fee and the small number of advisors on the deal. (The financial advisors on the deal are Moelis & Company for Omnicom and Rothschild for Publicis Groupe. ) What is the revenue overlap?
Wren: We have a process to go through ... as I said earlier our advisors have not raised any red flags. Eventually there will be a customary fee included if someone were to come in and do anything strange. No one realistically can interfere with a merger of equals. The reason on our side we didn't have more advisors is bec we didn't need them ... Maurice and I settled many of the issues. ... Normal and customary.
"Multiple of our brands are already doing common work, cooperating." Procter & Gamble, for instance. [He says that for instance Levy will have the creative and OMC has the media on many clients.]
Levy:"There were no leaks because we had so very few advisors. ..." He says firewalls or Chinese walls will be built to protect against conflicts.
Question on the $500 million in synergies mentioned in the press release, plus how did the idea first happen.
Levy:"It was not calculated it was just an encounter as we do socially from time time, ... John thought through, in the meantime we had another encounter, we asked was it a stupid idea, John saw it was not that stupid."
A presentation to investors will be made in due course.
Question on size and digital footprint, in English ... but Levy answers in French. He's talking about his longtime attachment to the French company and its owners.
Wren:"The process (on both sides) was exactly the same with the same emotions ... with the more difficult issues the fact that we were able to get through them the way we did (is a good thing)" ... Wren talks about trust again. "We're in complete alignment. ... there will be on occasion a couple things we simply can't agree ... we have a process which I won't go into."
Levy: [Talks about digital.] "The reason why size matters in this field is simply bec when you look at these internet giants, billions of people are connected, the classic approach of having some millions ... these numbers are absolutely huge ..."
Wren:"Anything worth having three years from now is going to be digital because the whole marketplace is moving that way ... even billboards these days." Wren mentions that he was one of the first investors in Razorfish in 1996. "I still have a T shirt from that." (Razorfish was later sold to Publicis where it is one of Publicis' biggest assets.)
Question about the diminished role of France in the deal:
Wren:"This building isn't going anywhere. This is the best real estate and it far exceeds anything we have. [Everyone laughs. Levy's office famously has a view of the Arc de Triomphe.] ... I give up my American identity and HQ and become European. ... these are truly global companies. ... the Netherlands was an elegant solution for anyone who would be troubled by that question so we proceeded with that."
Levy says something in French and everyone claps. "Voila!" he says, and the meeting ends.
+++
Adweek notes that if the deal triggers change-in-control provisions at Omnicom, CEO John Wren will receive a payout. He already owns about $70.6 million in stock. Adweek's Noreen O'Leary also describes how the deal will affect the board of Publicis:
Such a transaction would help Publicis buy the stock of retiring chair Elisabeth Badinter, the daughter of Publicis founder Marcel Bleustein-Blanchet, who has been a member of the holding company’s Supervisory Board since 1987 and its chair since 1996. She is expected to retire from that capacity at the end of 2015. Badinter, 69, is Publicis’s largest shareholder, with 9.13 percent of the company’s stock and 16.57 percent of voting rights. At the company’s current stock price of $59.35, her 19.2 million shares are valued at $1.1 billion. Depending on the terms of the deal, her holding could be halved.
O'Leary also notes that the heads of the major agencies — such as Publicis' Saatchi & Saatchi and Leo Burnett; and Omnicom's TBWA, DDB and BBDO — were not told of the merger talks as they were happening.
David Jones, CEO of rival network Havas Worldwide, has questioned the deal, saying it will not be in the best interest of clients because the new behemoth might be more bureaucratic and less nimble.
The first "Publicis Omnicom Groupe" press conference ended today amid applause and smiles at the news that the two ad agency holding companies will combine to become the world's largest ad network, with $23 billion in revenues.
But applause for what, exactly?
The merger will come with some significant downsides. Here are a few of them:
1. There will be layoffs. The companies said in their press release that they expect to get $500 million in "efficiences." That means job cuts. 60-70% of holding company operating costs are salaries. So $300 million of those efficiencies are likely to be duplicate salaries that can be cut. If you assume that the fully loaded cost of an employee is about $200,000 per year (including benefits), then that could mean up to 1,500 jobs lost. Most of those jobs will be in administrative and back-room positions. Wren said "there's no planned job cuts," but believe that when you see it.
2. Shareholders get chump change from the deal. Normally when there's a merger between two publicly traded companies, the acquired company's shareholders get their stock bought out at a premium, thus rewarding them for putting money into the company. Not this time. Because it's a merger not a takeover, neither stock will get a premium. The deal is actually designed to prevent that from happening. Omnicom holders will get a $2 dividend. Publicis holders will get 1 euro.
3. Omnicom CEO John Wren will get richer. Already one of advertising's richest men, the deal will likely trigger a change in control clause that will net Wren upwards of $4.3 million. It's not clear what will happen to the OMC shares he currently owns — more than 1 million of them, worth about $70 million. (Levy gets his full deferred compensation in the event of a new majority shareholder. That payment was already agreed before the deal, due to Levy's impending retirement).
4. Clients will leave these two networks. Both Omnicom CEO John Wren and Publicis CEO Maurice Levy gave little detail on how many client conflicts the combined company now has. Wren said there were about $6.5 billion in overlapping revenue on shared clients. He added that he did not believe the conflicts — in which the company finds itself serving two rival clients — would result in material losses. But tell that to Coca-Cola, which is now required to tell its marketing secrets to Publicis' Leo Burnett, all the while knowing that Pepsi is listening to advice from Omnicom's TBWA. These two agencies are now a mere phonecall apart. Maybe their two soda giants will live with the conflict. Clients have become increasingly tolerant of them over the years. But not all will. S.C. Johnson, for instance, is known to be rabidly anti-conflict — so that account could well bounce out of BBDO and head toward WPP's Ogilvy, the other agency on the business.
5. There will be an effective duopoly in advertising. Although there are several other agency holding companies to choose from, the lion's share of the business will now be controlled by just two companies, Publicis Omnicom and WPP. Craig Le Grice, the former digital lead at WPP and now chief innovation officer at Blue Rubicon, tells me, "How much competition does this create? In markets like the U.S., specifically, how much trust can there be with such a duopoly? I am unsure that major clients like Procter & Gamble (etc) want to have to choose between just two holding companies for their billion dollar annual spends. Even if they do, the lack of competition will reduce the need to genuinely create stand out work — which is a blow for strategy and creative."
So there it is. The top named executives in both companies will likely get bonuses triggered by change-in-control clauses. Shareholders get very little. Clients get less choice. And employees get to update their resumes.
SEE ALSO: Omnicom And Publicis Announce Completely Unexpected Merger In Paris
Omnicom CEO John Wren and Publicis Groupe CEO Maurice Levy were asked repeatedly about client conflicts on their call with Wall Street investors this morning. The call was held to describe the merger of their agency holding companies into a massive combination, Publicis Omnicom Groupe.
That merger occurred with little warning this weekend, after news leaked on Friday.
Both men reassured analysts that they did not believe any major client would defect. But analysts seemed skeptical at the idea that there would be no negative fallout from the combination.
The pair also addressed the stock dividends that the new company wll pay. They started out by saying it would be 35% of net income, but then back peddled and admitted that was merely a goal not a hard number.
Lastly, they were asked about divestitures — the idea that some of their agencies are now redundant or replicative and should be sold. No reassurances were given, although no major sales are planned.
Here are the slides that go with the call.
And here is Wren's letter to staff on the merger.
Here's our live coverage of the call:
Wren is speaking ... He says stock holders' shares will be worth a 50-50 split of the equity on the new company.
Now Levy ... He starts by expressing the longtime respect he's had for the Omnicom group.
Looks like this call is going to be big on rhetoric. We're hearing a lot of about strategic visions and new standards, and not many specifics.
The new company will have 130,000 employees.
"Our company will be the very best place to work for those who thrive on a changing strategy."
There will be "fun," Levy says: "The quality of passion and engagement that comes from doing stimulating meaningful work for great clients."
The phrase "sets a new standard" seems to be Levy's mantra.
Now he's talking about the rise of digital, says POG will be best placed to tackle it.
Here's a snapshot of the new company:
Wren says they'll have 7 of the 15 most awarded agencies in the world. "We have the best brands across every discipline," Wren says.
And here are its financials:
Wren says the new company will have much better coverage of developing countries:
The new company will have $2.6 billion in free cashflow, Levy says.
In the S&P 500, the new company will be bigger than Yum! Brands:
"The transaction has been structured as a true merger of equals" and there will be no tax implications, Wren says.
OMC holders will receive a $2 special dividend. PUB holders will get 1 euro, and the new company will be based in the Netherlands for tax reasons, Wren says.
Levy and Wren will be co-CEOs for 30 months, after which , "I will continue as the company's CEO," Wren says.
They will combine credit facilities at both companies, Wren says. Dividends will continue to be paid at around 35% of net income, Wren says.
Levy is wrapping up: POG will have the best of everything "under one roof.""We have very similar corporate cultures and core values.""We share a clear vision for the future of the industry."
"This merger of equals creates a new standard for our industry." [That phrase again!]
Questions!
Q: Have you guys talked to clients and what will be the client losses?
Wren: We've spoken to all of our specific clients ... there's nothing significant to speak of for the most part most of them simply congratulated us.
Levy: On the Publicis side we did exactly the same ... the reaction has been extremely positive ... we will have time to look at the various issues ... we don't anticipate any major hurdle or any major problem.
Q: Savings?
Wren: The savings can't begin until after the transaction is complete.
Levy: We were looking at key areas where we could generate more revenues ... and also thanks to the combination of our organizations we could get some important savings partly from third parties.
Q: Difference in financials, accounting bases? How might the accounting change? What's the new tax rate? There is a perception i think that this kind of trans would lead to conflicts that might cause you to lose some clients? Did the world change, did that used to be a bigger risk?
OMC CFO Randall Weisenberger: A few line items in different geographies will be different.
Wren: "We're going to work extremely hard with our clients and come up with creative solutions but I don't think no single client is big enough to disturb the deal."
Levy:"There is nothing that could derail the combination." Holding companies are already handling conflicts. "This is the story of our lives these days ... there is a limited number of players in the advertising field."
Q: Tech acquisitions. Buying vs building.
Wren: The two companies and two strategies complement each other in many ways. ... when you join those two together we become incredibly powerful.
Levy:"We have two different strategies ... we had the choice in investing massively to increase our analog position or our digital, ... we had to invest in digital. ... so this make a complementary operation ... we need to make an inventory ... how we will be organizing." [Levy makes it sound like they haven't actually figured out how to organize the new company yet on an agency by agency basis.]
Q balance sheet payout points. OMC has been strong on payouts. Leverage appetite for new company?
Wren: The company has to get formed first ... [We'll buy the companies we need and then] with the balance of our free cashflow we'll probably use it for buybacks.
Levy: We are absolutely on the same line. [They intend to try to stick to that 35% of net income dividend payouts.]
Both men keep saying they'll have to ask their new board — which sounds like they're leaving wiggle room to get out of that 35% commitment later if need be.
Q: Feedback from big digital internet players? How will it change your relationship.
Wren:"All I've gotten is love letters." [Laughs.]
Levy:"I got the same."
Q: Do you think it will accelerate the creation of standards in digital format in digital? (Lack of standards has been holding back spending) Is the 35% a gradual goal or is it immediate?
Levy:"On the dividends, clearly we will have only one ratio and that ratio if it is approved by the board will be 35% or around 35%, 31, 32, 33 I don't know." ... Regarding standards in digital ... we are working with teams at Facebook on new standards and the fact that we are combining our forces ... the sheer size of the operation will give us a responsibility to help defining new standards ... for the benefit of the industry and all of clients."
Q: Where will the $500 million in savings come from?
Weisenberger: Third party costs, health care, insurance programs, research, systems, procurement, by almost doubling our volumes on either side we can see some significant opportunities.
CFO Jean-Michele Etienne: IT will be another area.
Q: Client losses - what are the estimates? You might lose 8-10% of revenues to client conflicts.
Levy:"We have been through many operations mergers in the last few years ... what you see, through al this period we have not lost at the time of the merger one single large client. Not one single large client ... sure there are some competitors who would like to see us losing some large accounts. ... I'm not saying we will not have any issues. ... I'm absolutely certain this will be a very good merger with very, very, very little revenue lost."
Q: Why this merger now, why now as opposed to several years ago?
Levy: Several years ago I think OMC and PUB would not have made a merger of equals.
Wren: The stars aligned.
Q: Any divestitures planned? Big data and enhanced scale in media buying?
Wren: Divestitures - "there's no significant divestitures planned at the moment. We'll listen to the regulatory bodies."
Levy: Media - this market is highly competitive. ... We believe the competition will remain fierce in this segment.
Q: He jokes that the HQ should have been in Italy ... CMO/CIO opportunities ... the challenge coming from non-traditional players like IBM and Accenture ... what is the major challenge for this merger? Improvement in organic growth?
Levy: Regarding Italy, the only place that would have worked well was already busy - the Vatican. [Laughter]. ... (He's not seeing any problems in terms of the merger.) "All our assumptions are extremely, extremely reasonable.""On organic growth" ... (when you align all the resources) "this will dramatically generate more growth." (Growth will come from areas where clients couldn't previously get everything under one roof.)
Levy declines to put a number on the increased organic growth ... and that's it! The call ends.
Good morning, AdLand. Here's what you need to know today:
Of course the biggest news from this weekend is that formerly number two and three holding companies, Publicis and Omnicom, merged. Revenues for Publicis Omnicom Groupe will now far exceed WPP at $23 billion.
GroupM Global President Dominic Proctor criticizes the merger. Although he said that it is "an interesting move," Proctor continued, "neither Omnicom nor Publicis was able to bring their investment teams together effectively as individual companies, so it be fun to see if they can now do it together." GroupM is part of WPP.
Havas CEO David Jones said that the merger will be bad for clients and employees.
FT takes a look at Omnicom's John Wren, "the quiet man of ad land."
And Digiday's Brian Morrissey takes a peek at the winners and losers of the merger.
Speaking of Digiday, the site had a makeover.
Ketchum hired Andrew Ager, formerly at Weber Shandwick, as a creative director in its London office.
Ad agency Crush attached a GoPro camera to an adorable dog. Adweek has the pictures.
Stephen Colbert has some thoughts on branding.
Previously on Business Insider Advertising:
When a major marketer chooses to spend hundreds of millions of dollars with a certain ad agency, it usually doesn't expect its arch rival to be housed under the same roof.
But after holding companies Omnicom and Publicis announced its surprise merger Sunday, making it the biggest ad entity in the world, the world couldn't help but notice that huge nemeses had overnight become part of the same family. Pepsi and Coke. AT&T and Verizon. Apple and Google.
Omnicom CEO John Wren adamantly stated that he was not concerned about conflicts of interest.
"We're going to work extremely hard with our clients over problems and try to come up with creative solutions," he said."But at this point, if the deal is completed, there is — I don't believe, a significant client ... no single client would be significant enough to disturb the deal."
As holding companies have gotten bigger, and conflicts more common, they have come up with creative ways to retain conflicted business. Accounts can be split by geography or by agency, with "firewalls" between them. It's up to the client to trust that the splits are done in good faith, however.
According to the Wall Street Journal,"One analyst said he has heard several times from executives, generally, that if two top ad agencies combined they should expect to lose about 8% to 10% of combined revenues because of conflict clients." Wren thinks the biggest loss would be 1% of revenues.
Since some huge companies with boatloads of different products, like Procter & Gamble, already had different goods living in both Publicis and Omnicom, the merger won't be dramatic for some major clients. But for companies that don't like competition — S.C. Johnson historically hates conflict — the partnership could be problematic.
Here are some of the biggest conflicts:
Pepsi's entire ad campaign in the 1970's and 80's revolved around the Pepsi Challenge, which had a sole purpose of proving that consumers liked drinking Pepsi more than Coke. The fact that the two rivals will now be living under the same roof is by far the biggest conflict created by the merger.
Ad Age wonders if WPP and Interpublic, two separate holding companies that have both worked with Coca-Cola, might have the ability to steal away the soda.
In fact, almost every telecom company (AT&T, Sprint, T-Mobile, Verizon) will now be under Publicis Omnicom Goupe's creative control if no one moves.
A-B InBev, however, isn't concerned and has different labels with each holding company. "It doesn't change anything related to agency conflict,"VP of marketing Paul Chibe told Ad Age in an email. "The holding-company approach is to have different network shops to manage potential conflicts. That doesn't change in the event of a merger. We work with Publicis and Omnicom agencies in many countries."
A Nissan spokesperson told Reuters, "Renault and Nissan are both major global clients of both Publicis and Omnicom. We welcome the direction taken by Publicis and Omnicom to create a best-in-class communications, advertising, marketing and digital services company and will continue to work with them."
BMW sales chief Ian Robertson, on the other hand, was less optimistic. "Ideally, clearly we (would) have that independence from other manufacturers," he said. "But in a world which is now connected and there are so many mergers of this type, maybe that's something that is not an ideal position."
SEE ALSO: Here's the big downside to the Omnicom-Publicis merger
Wall Street is still reacted to Sunday's Publicis-Omnicom merger by driving up stock prices for competing companies in speculation that a wave of M&A might sweep the sector.
Although Omnicom and Publicis didn't see gains by closing bell yesterday, Interpublic and Havas saw their highest figures in years.
The merger has created a tier of two mammoth companies — Publicis Omnicom Groupe and WPP — with a bunch of smaller holding companies a long way behind them in size. Many analysts see them as ripe for the picking.
Analysts told Bloomberg that the other large agencies like Havas, Aegis and Interpublic are now looking to consolidate as well, which makes sense considering that they will have to compete with an entity which, given its scale, will get premium print, TV, and online rates. Bloomberg reports:
The marriage of Publicis and Omnicom to become the world’s biggest agency may spur WPP Plc (WPP) to seek acquisitions of its own to regain its leading position in the industry, according to Bank of Montreal. Havas is one of the last available targets and could lure WPP, according to Natixis. A merger between Havas and Interpublic (IPG) is another possibility, said Liberum Capital Ltd., which also sees MDC Partners as a potential target.
Here's how things looked on Wall Street.
While interest peaked when the market opened, stocks dipped slightly below Friday's closing price by 0.6%. Its highest rise Monday was 8.3%.
The other entity in the merger saw a similar fate. At first traders were excited, with stocks rising as much as 6.6%, but come the end of the day everything fell flat.
Interpublic was the true winner yesterday. The holding company closed at the highest it has been in more than nine years at $16.61. That's 4.7% up from the day before. The company's highest bump was 9.8%.
A note from CEO and chairman Michael Roth circulated to staff after the merger went public that stated, "“as this weekend’s surprising news shows, there’s no telling what might take place, but we don’t see the need for major M&A to keep delivering on our plan to move Interpublic forward.” That doesn't shut down the possibility of an acquisition, which we noted might be a good move earlier this year. MDC Partners is one potential target.
Havas hit a 52-week high. It closed 4.6% up.
But CEO David Jones doesn't seem gung ho about M&As any time soon. In fact, Jones came out very negatively regarding Publicis and Omnicom's decision to merge. ""I'm not sure this is in the best interests of their clients or their talent,"he said in a statement."Clients today want us to be faster, more agile, more nimble and more entrepreneurial, not bigger and more bureaucratic and more complex."
Jones reiterated to Bloomberg, “We’re not interested in playing the bigger-is-better game.” Havas is significantly smaller than its competitors.
MDC Partners hit an all time high of $24.
Deutsche Bank has said that the holding company is an acquisition target, perhaps by Dentsu, on two separate occasions. CEO Miles Nadal, who would get a $15 million stock windfall if he ever sells, teased future consolidations to Bloomberg.
“Consolidation will continue to accelerate,” Nadal said. “We are a company whose control block remains in the hands of shareholders so I think, by definition, we are a company that anyone could bid for." Of course, he continued he doesn't have any short term plans.
WPP, which had its status as the largest holding company in the world snatched away come Sunday morning, had a far less exciting day. Though there were some spikes, as of this morning, stocks are down.
Size does matter for CEO Martin Sorrell, who is known for his rivalry with Publicis CEO Maurice Levy. And earlier this year, Business Insider's Jim Edwards noted, "If either of the other Big 3 networks makes a deal to create a network bigger than WPP, Sorrell will be unlikely to sit idly by."
Now it's time to see what actually happens. Some analysts speculate Havas would be a good fit.
Sorrell has noted that while Publicis and Omnicom's merger is "bold" and "surprising," it will also cause Omnicom to "throw out a lot of opportunities" for the firm. Opportunities (aka clients) that WPP might be able to scoop up. Sorrell told CNN, "We've seen just in the first 24 hours a number of clients and talent are concerned about what this means for them. So there will be a reassessment."
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Android Takes 67% Share Of Global Tablet Shipments (Strategy Analytics)
Global tablet shipments reached 51.7 million units for the second quarter of 2013, according to new data from Strategy Analytics. Android dominated the quarter with a 67% share of all tablet shipments, which grew from a 51.4% share in the second quarter of 2012. Apple's tablet share fell almost 20 percentage points from 47.2% last year to 28.3%. In third place, Windows accounted for 4.5% of all tablet shipments. Read >
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Sir Martin Sorrell is more used to making the news rather than reacting to it. But it was in reaction mode that he found himself last weekend when he learnt that Omnicom and Publicis were to merge.
If it goes ahead, the $35bn (£23bn) deal will strip WPP, the advertising group he founded, of its crown as the world's biggest advertising agency. It will also throw the multi-billion-pound world advertising market into a state of flux, with some suggesting that Sir Martin has been outmanoeuvred by Maurice Levy, the chief executive of Publicis and his arch-rival.
As Publicis and Omnicom declared themselves an item, speculation immediately turned to WPP and Sir Martin. Its shares rose on hopes that it might pick up some disgruntled clients from the newly-formed behemoth.
Other major advertising groups such as Havas and Dentsu also gained, as investors speculated that Sir Martin would respond in the way he always has: by expanding his empire.
But the gulf between WPP and the merged Omnicom-Publicis is so large, that others feared Sir Martin might lose the fight to stay on top. Levy is expected to step back in two years, handing the keys to the kingdom to John Wren, the chief executive of Omnicom.
The Frenchman's withdrawal will not bring about an entente cordial at the top of the advertising game, however. Wren is every bit Sir Martin's adversary, too.
It is certainly not time for Sir Martin to sail off into retirement just yet. The entrepreneur and his family's interest in WPP shares amounts to as much as £222m, and Sir Martin is going to want to ensure that WPP mops up every advantage that it can from the Omnicom-Publicis merger.
Analysts and industry insiders are bracing themselves for a good deal of fallout. Although the Omnicom-Publicis deal is styled as a merger, that is widely regarded as a branding trick. As one senior ad chief puts it: "It is an American theft of a French crown jewel in disguise."
The press conference to announce the deal was originally scheduled for New York, where Omnicom is headquartered. However it is understood to have been switched to Paris to help bring the French government onside and smooth any potential regulatory pitfalls.
The strategy appeared to work. To many people's surprise, the French government gave its blessing, although sources claim there is a growing concern in Paris that it might have allowed one of its treasures to be snatched from under its nose.
When Levy steps down, power will rest with Wren and the company's centre of gravity will be New York.
The task of integrating Omnicom and Publicis will be a tough one. Critics claim that the two have a long way to go before they integrate the businesses they already own, let alone learning how to work with each other.
Omnicom is regarded by many in the ad industry as a more creative business than Publicis, although the French company's recent investment in London firm BBH certainly bolstered its credentials. But arguably the challenge of meshing American and French business cultures will be even harder than trying to address the discrepancies in the way they approach advertising in particular.
"There is a cultural clash between US and French business styles. There are few French-US mergers that have actually worked," says one observer. According to the British advertising chief, Michael Greenlees, who sold his agency Gold Greenlees Trott to Omnicom in 1998 and now runs Ebiquity, the creative side of advertising is not where the value in the merger lies.
Losing a few clients because of conflicts of interest will be a small price to pay, he believes, given the opportunity to build significant scale in buying advertising slots.
The profit margins on advertising campaigns are now much smaller than during the industry's 1980s heyday, after contracts moved from a commission to fees basis. There have even been rumours that Sir Martin might seek to divest WPP's creative businesses to focus on marketing, data and media buying.
The lack of transparency in how advertising slots are sold on by the big agencies means there is a danger for advertisers in a merger of Omnicom and Publicis, according to Greenlees. The merged company will control around 35pc of all advertising slots worldwide.
"Facebook, Google and Twitter in particular offer globalised coverage, replacing the fragmented and localised traditional media landscape, enabling the media groups to buy advertising inventory at enormous discounts, which they then sell on to their clients," said Greenlees.
"The complex multi-layered structure of these groups enables them to create internal pass-through rates, which effectively disguises margin.
"The media agencies have so far done themselves few favours with advertisers and the issue of full transparency has become a source of significant concern within the advertiser community."
Observers say Publicis has an opaque management style, whereas Omnicom operates much more transparently. Levy has made emerging markets a priority at Publicis, whereas Omnicom has a US-centric world view. When Wren travels outside the US, he is known to keep his visits brief.
More generally, US companies obsess about due diligence and protocol in a way businesses in many other nations do not. "American and British agencies have a much stronger system of compliance than French companies do," one industry source said.
Little surprise, then, that news of the merger was greeted with some consternation. Clients are likely to watch and wait to see how things play out before they take action, but most industry observers expect some high-profile defections sooner or later.
Coca-Cola has already privately expressed its concerns. The drinks brand is represented by Publicis, but will find itself using the same advertising conglomerate as PepsiCo once the Omnicom-Publicis deal is finalised. Executives at the drinks giant were not happy to learn of the merger only last weekend.
Despite soothing public words from Levy and Wren, their plan is bound to put some big noses out of joint. WPP will still be working out how best to take advantage, whether by buying companies, targeting specific big clients or encouraging regulators to get involved.
Sir Martin's response so far has been relatively muted. Unused to being in second place, his next move will surely be more aggressive.
In its first earnings presentation since Omnicom and Publicis announced they planned to merge last month,WPP expressed a lack of concern Thursday at the consolidation that would knock it from its perch as the world's largest advertising holding company.
WPP highlighted the regulatory issues, potential internal conflicts, and "clunky" organizational structure that will befall Publicis Omnicom Group in a press release declaring that the merger would not harm its business.
"All in all, we believe a post-POG world presents us and other competitors, as a result, with enhanced opportunities and is at worst neutral and at best highly positive, resulting in further consolidation and concentration," the release said.
WPP CEO Martin Sorrell went even further, slinging barbs at his new, bigger rival:
"Its structure and organization is clunky," he said in a statement. "Potential client and, even more importantly, people conflicts are considerable, exacerbated by a lack of pre-announcement consultation."
WPP charts represented "POG" with what he described as "a sludgy brown color," which Mr. Sorrell gleefully explained was what you get when you mix purple and orange [the corporate colors of Publicis and Omnicom].
WPP said that in response, it will continue to invest in growth areas like new media, data investment management, and rapidly developing markets. The holding company, home to agencies Burson-Marstellar, Ogilvy, and Grey, said it has raised its fast-growth markets and new media sector targets from 35-40% of total revenues to 40-45% each over the next five years.
The company also said it would continue to leverage its "Team" approach, which offers clients brand-specific teams made up of personnel from various WPP agencies.
"Again, a reinforcement of the same strategy, but more and faster, as we have already started to implement," the release said.
WPP slightly raised its 2013 forecast from just more than 3% growth, but did not say what the new target was. The company reported top-line revenue of $8.2 billion, and like-for-like growth of 2.4%.
The head of WPP, the world's largest advertising holding company, said major players in online data management like Nielsen, Facebook, and Google are now the company's main competitors, standing alongside its traditional advertising rivals.
In comments made Wednesday at the American Association of Advertising Agencies' Data Summit, Sir Martin Sorrell said 75% of WPP companies' $18 billion in revenues now comes from digital advertising, data investment management, and media planning.
"We're not a traditional creative business anymore," Sorrell said. "I don't know what the numbers are for our [traditional advertising] competitors, but what I do know is even they have shifted ground."
This of course was not the last thing Sorrell had to say about his competitors, unwilling (or perhaps unable) as he is to refrain from poking fun at the proposed merger of his chief rivals, Publicis Groupe and Omnicom Group.
Sorrell said the combined Publicis Omnicom Group, which would replace WPP as the world's largest advertising services holding company, is silly to think it could compete with Facebook and Google's data troves after arriving so late to the party.
In his mind, the Publicis-Omnicom merger is a failed attempt to catch up to WPP well after it established itself in the targeting and measurement field by purchasing the digital marketing company 24/7 Media in 2007.
“It’s amusing to me that the POG Group is now saying that they can be bigger to compete with them," Sorrell said. "Five minutes ago, they were saying they want to partner with them. They don’t know which way their heads are going to go."
"It’s unrealistic to think you’re going to go against a $300 billion company like Google, or Facebook at $100 billion. And by the way, watch out for China.”
Sorrell said that in order for the advertising holding companies to keep up with their competitors in the online space, they need to continue making investments in technology, as WPP did when it launched the data management platform Xaxis in 2011.
Still, he said, the vast majority of WPP's investments have been in human capital, a worrisome situation in an industry increasingly reliant on technology.
"The lines of difference between us and all those sets of competitors that I mentioned, particularly the ones that are closer, are going to get less and less," Sorrell said. "And that worries me because we're not great data engineers, historically, as an industry. We need to invest more in technology."
SEE ALSO: Our list of the 24 Most Creative People in Advertising
In the latest piece of evidence that the advertising world once dominated by Mad Men creatives is giving way to one owned by technology and analytics gurus, a social media network in its first day of public trading is now as valuable as the world's largest advertising services holding company.
In a note sent to investors this morning, Pivotal Research Group senior analyst Brian Wieser wrote that at a price of $45 per share, Twitter is worth about $30 billion. That's nearly the same valuation as the $35 billion market capitalization of the combined Publicis Omnicom Group, which will become the biggest advertising company in the world once the proposed merger is cleared by regulators. POG will have combined revenues of $23 billion. Twitter will have annual revenues of somewhere around $600 million this year.
Twitter began trading today at $45.10 and is currently trading at $45.18.
SEE ALSO: Twitter Just Got Downgraded To Sell!
The $35 billion merger between Omnicom and Publicis Groupe SA has been called off, the Wall Street Journal reports, citing sources.
The merger, first announced this past July, would have created the world's largest advertising holding company, dethroning current No. 1 WPP.
The two companies confirmed the Wall Street Journal's report in a joint statement shortly afterward, saying that they had released each other from all obligations related to the transaction and that no termination fees will be payable by either party.
The merger's implosion was foreshadowed by recent reports from the Wall Street Journal, which said the two sides were struggling to get the combined company, planned to be based in the Netherlands, registered as a tax resident of the United Kingdom.
Additionally, Omnicom and Publicis were said to be sparring over who would get to be the chief financial officer of the merged company. Omnicom wanted its chief financial officer, Randall Weisenburger, to have the position, while Publicis was pulling for its own CFO, Jean-Michel Etienne. France's Publicis and the United States' Omnicom were also unable to decide which company would legally acquire the other.
"The challenges that still remained to be overcome, in addition to the slow pace of progress, created a level of uncertainty detrimental to the interests of both groups and their employees, clients, and shareholders," Publicis chairman Maurice Lévy and Omnicom CEO John Wren said in a joint statement. "We have thus jointly decided to proceed along our independent paths. We, of course, remain competitors, but maintain a great respect for one another."
Had it been completed, the merger would have brought many of the world's most prominent advertising and public relations agencies under one roof, including Omnicom agencies BBDO, DDB, and Ketchum, and Publicis agencies Saatchi & Saatchi, Leo Burnett, and BBH.
The idea was to provide the combined company with the sort of scale required to maintain leverage against online advertising companies like Facebook and Google, platforms on which Omnicom and Publicis' clients are spending more and more of their budgets these days. By buying ads in greater bulk, Omnicom and Publicis would theoretically be able to fetch lower prices and pass those savings on to their clients.
One person who is sure to be pleased by the news is the highly competitive WPP CEO Sir Martin Sorrell, who is bitter rivals with Publicis' Lévy.
Since the merger's announcement, Sorrell has taken every available opportunity to insult Publicis and Omnicom, attacking them for what he said would be a "clunky" corporate hierarchy on a conference call back in August.
It was then that Sorrell said combining the two companies' corporate colors (Omnicom's orange and Publicis' purple) would create a "sludgy brown" mixture.
Secure in his position as head of the word's largest advertising company, Sorrell told the Financial Times that the deal “seems to have been driven by emotion to knock WPP off its perch and, of course, by French charm."
He added: “In the end, it was a case of eyes bigger than tummy."
Good morning, AdLand. Here's what you need to know today:
Airbnb is running its first global advertising campaign. Created by its ad agency Pereira & O'Dell and directed by Alma Har'el of Tool, the campaign is anchored by a 60-second ad that seeks to show people that staying with an Airbnb host can make traveling in a foreign country feel more like home.
The ad will run in the U.S, U.K., Germany, France, Singapore, South Korea, Japan, Brazil and China, and on sites like YouTube, BuzzFeed, Twitter, and Facebook.
Omnicom and Publicis' proposed $35 billion merger was not meant to be. The two sides called off the merger last night, citing "difficulties in completing the transaction within a reasonable timeframe." In the weeks leading up to the deal, the companies were said to be having difficulty obtaining tax residency in the U.K. and fighting over who would be chief financial officer of the combined company.
Ad Age has an interview with the victorious Sir Martin Sorrell, the WPP CEO and arch rival of Publicis and Omnicom. Sorrell gloated that the proposed deal was an emotional decision made to knock WPP off its perch, but that Omnicom and Publicis' "eyes were bigger than their tummy."
Snapchatsettled charges brought by the Federal Trade Commission that alleged the startup falsely promised that its messages would disappear after users sent them. The FTC also claimed Snapchat collected address book information without user consent, and allowed video messages to be stored and accessed on a recipient's phone. The settlement requires Snapchat to implement an in-depth privacy program and be monitored by a privacy professional for 20 years.
Y&Rappointed Jon Bird global managing director of Labstore, the agency's retail and shopper marketing network. Bird previously co-founded and led Y&R's retail marketing agency, IdeaWorks, in Australia and New Zealand.
E-Trademoved its media planning and buying account to a WPP team made up of talent from OgilvyOne and GroupM. The account was previously held by the Publicis agency Spark.
CP+Bhired Spence Kramer to be its global managing director. Spence was most recently at Wieden+Kennedy, where he ran the Coca-Cola business, and before that, the Nike business.
Interactive audio ad company XAPPMedia hired Lisa Namerow to be its senior vice president of business development and publisher relations. Namerow was most recently senior vice president of strategic partnerships and audio monetization at Slacker Radio.
Previously on Business Insider Advertising:
While regulatory approval has been known to halt a merger in its tracks, a $35 billion pending acquisition that could have resulted in the largest advertising agency on the planet has been scrapped for decidedly more personal reasons.
U.S.-based advertising giant Omnicom and its French counterpart Publicis have tossed out a deal announced last July, primarily due to internal cultural clashes and power struggles within the forthcoming entity’s executive suites, Reuters reports.
“Omnicom wanted their people to fill the CEO, CFO and general counsel jobs,” Publicis chief Maurice Levy told the outlet. “I thought that went too far. I was not ready to cede on this point.”
Related: Hear That? Apple May Buy Beats Electronics in $3.2 Billion Mega Deal.
“There are strong corporate cultures in both companies that delayed us reaching an agreement,” Omnicom CEO John Wren explained -- and these delays had resulted in astronomic losses of work, namely more than $1.5 billion in the past month alone.
Approximately 65 percent of mergers falter -- primarily due to lack of corporate blending, says Alan Smith, CEO of the M&A consulting firm Bay Pacific Group.
"The danger time in a corporate culture clash is in the very beginning when employees on both sides feel threatened by the combination," he advises. "By acknowledging its presence early on and educating employees as to its dynamics, people will be better prepared to appreciate differences that may help build a stronger organization in the long run."
Related: Another Mega Merger: AT&T Reportedly Eyeing $40 Billion Purchase of DirecTV
Though the deal would have called for 50-50 ownership and had been initiated to cope with an evolving ad industry increasingly dominated by tech giants like Google and Facebook, both sides ultimately fell prey to a corporate soap opera of sorts.
There were also complications over legal and tax issues -- and also of note was that China’s antitrust regulator, Mofcom, had not granted the deal regulatory approval, notes The New York Times.
As they go their separate ways, both Omnicom and Publicis face no termination fees, but will split the legal bills resulting from the failed transaction.
Related: The $19 Billion WhatsApp Deal Was Big, But Not the Year's Biggest (Infographic)
Omnicom Group, the world's second largest advertising holding company by revenue, just gave the market another major indication that TV dollars are moving to digital.
Speaking on the company's third-quarter earnings call Tuesday, Omnicom Group CEO John Wren explained how the rise of programmatic advertising and the increase in quality inventory becoming available online over the past few months has seen a "rapid shift" in the way clients have been booking advertising.
Referencing the move from TV and traditional advertising to digital in particular, Wren said:
"Marketing budgets continue to grow . Clients, though, especially when it comes to TV, there has been, I'd say, a shift. When you look at traditional areas like the upfront and scatter market, if you went back a couple of years there was an urgency on the part of clients to make certain they didn't miss out on the programming they wanted.
"With all the various choices of how to reach the audiences you want to reach today and our ability to do it, there just wasn't that urgency going into the upfront this year. And with respect to the scatter market, I think you are seeing money being diverted into other areas.
"I believe that trend will continue. I don't think TV is dead, but I just think there is going to be a shift."
The upfront refers to the time of year when TV broadcasters sell all their advertising for their most attractive Fall programming ahead of time. The practice keeps the price of TV advertising high because it creates a short, limited window in which brands feel they need to lock in the best deals they can by buying in bulk.
The scatter market refers to TV advertising sold closer to the broadcast date. It is sometimes referred to as leftover advertising and is often sold at a far higher rate if the TV show pulls in bigger ratings than previously forecast.
Wren called to the move from traditional media buying to digital practices as "the shift from mass marketing to mass personalization." That shift isn't new advertising money coming into the market. It's TV advertising money (and other traditional advertising money) moving into more-measureable online advertising. That move from one pot to another was also referenced by Omnicom Media Group CEO Daryl Simm earlier this month when he said he was advising clients to shift as much as 25% of their TV budgets to online video.
Meanwhile in recent months Omnicom, which represents more than $50 billion in annual ad spend for clients like Apple and Pepsi, has signed huge global upfront advertising commitments with Instagram, Twitter, and the now Disney-owned YouTube content creator Maker Studios and became the first advertising network to trial Facebook's new Atlas advertising platform.
All these stories compounded together ought to frighten TV broadcasters. They need to change their approach to selling, optimizing, and measuring advertising if they are to prevent this "shift" from rapidly decaying their businesses.
However, to put this into some perspective, TV advertising is projected by eMarketer to make up 38.1% of total US ad spend in 2014. Digital, meanwhile, is estimated to make up 28.2% of the total advertising outlay.
So even though eMarketer also predicts digital spend will overtake TV spend in 2018, there is still quite a way to go before we stop seeing 30-second ads on our TV sets. It's also worth bearing in mind that broadcasters are also offering digital advertising opportunities across their websites, video-on-demand platforms and apps, which can make up for some of the traditional advertising shortfall.
Omnicom also revealed on the earnings call that programmatic media buying — which makes the buying of media far easier than TV because the process is automated —accounts for just around 2% of the company's revenue. However, with a recent Forrester study forecasting programmatic ad spend across North America will double to $39 billion by 2019, Wren said the company was" rapidly evolving" its business to ensure it had the capability to serve clients in this area. There has been a "meaningful increase in demand" from clients for the company's programmatic services over the last year, he added.
Omnicom Group's third-quarter net revenue rose 7.4% (or 6.5% on a like-for-like basis) to $3.75 billion, while net income increased 24.4% to $243.8 million. The company was boosted by strong advertiser demand in its home US market.
The earnings report came six months after the company's proposed merger with Publicis Groupe to create the world's biggest advertising group collapsed. The company said the pre-tax impact of the abandoned transaction in the year to date was $8.8 million, which was mainly spent on professional fees.
John Wren, the CEO of the second largest advertising agency holding group in the world, Omnicom, received $24 million in compensation in 2014 — the same year as his company's failed $35 billion merger attempt with France-based Publicis Groupe.
Wren's total compensation was up 33% on 2013, according to the company's latest SEC filings.
Wren's base salary was $1 million, but 95% of his compensation is tied into performance. He also receives other personal benefits such including $82,751 for personal use of aircraft, an auto allowance of $9,120, a medical allowance of $4,000, and a "years of service award" of $5,000.
While Wren's take-home might seem high, it is less than half of that of WPP CEO Sir Martin Sorrell's pay package. He is set to receive $53 million in share awards this year, on top of his $1.6 million salary. In 2013, Publicis Groupe's Maurice Lévy earned $6.3 million in total compensation (the company's annual report for 2014 is not yet out.)
Lévy admitted last year that Publicis was the more interested partner in the proposed merger with Omnicom, which may explain why Omnicom — and Wren's pay — were relatively unaffected by the merger's collapse.
Omnicom posted a 5% lift in revenue to $15.3 billion, and a 11.4% rise in net profit to $1.1 billion in the 12 months to December 31.
Publicis Groupe suffered a torrid first nine months of the year but managed to pull it back in the fourth quarter, reporting a 4.3% lift in revenue for the full-year to €7.23 billion ($7.8 billion,) and a 4.7% rise in headline profit to €829 million ($890 million).
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Pivotal Research Group analyst Brian Wieser has downgraded his stock ratings for all of the advertising agency holding companies Pivotal covers — reducing IPG from buy to hold, and WPP, Omnicom, and Publicis Groupe from hold to sell. He cites "emerging concerns among marketers" around "mis-leading" payments and different forms of volume discount rebates that agencies claim in the United States.
As a result, Wieser advises investors in such companies to move to the sidelines or "exit the sector altogether."
Media rebates are one of the most controversial areas of advertising, and are not new: Media companies pay them to agencies to keep client dollars — in the form of ad buys — rolling in, even when those dollars may be more efficiently spent elsewhere.
They exist in a legal gray area. Usually, most client-agency contracts insist that all discounts, rebates and benefits earned by media spending be returned to the client. But if a TV station returns a discount to a media-buying agency there is no way for the client to know about that payment if the agency does not disclose it. Historically, agencies have padded their margins with these payments. Clients haven't bothered to pursue them because it would be complicated and resource-intensive to do so. Critics regard them as bribes or kickbacks. Agencies have defended them as a legitimate way to maintain their profitability, and note that if clients felt they were being ripped off they would go elsewhere.
Grey Global Group was once sued unsuccessfully by its former CFO over the issue of whether rebates were legit.
Recently, former Mediacom CEO Jon Mandel alleged that agency "kickbacks" are still "widespread" and cited them as one of the reasons he left the agency world, AdAge reported. "Have you ever wondered why fees to agencies have gone down and yet the declared profits to these agencies are up?" he said at the time. GroupM (the media division of the WPP group, which owns Mediacom) denied the allegations, saying "In the US, rebates or other form so hidden revenue are not part of GroupM's trading relationships with vendors."
Nevertheless, Wieser writes in a research note published on Monday:
The volume and specificity of allegations by aggrieved media owners, former agency executives and marketers are difficult to ignore. Rightly or wrongly, there is a growing perception among marketers that agencies have been mis-leading, transferring value associated with media volumes without clients’ full understanding or support. Between cash rebates, consulting arrangements, vendor-funded staffing or services, inventory banks, equity provided for spending volumes, shifting of inventory from one entity to another and all of the above practices involving volumes in one country shifted in exchange for benefits in another, few marketer-clients in the US fully understand the specific arrangements their agencies undertake with media owners.
Despite its Mediacom business being namechecked in the aforementioned trade magazine reports, Wieser says WPP is probably the most "immunized" holding group in the event that clients decide to do something about the problem.
That's because WPP is the only group to disclose both gross revenues versus revenues net of media trading. Indeed, Sir Martin Sorrell has recently been vocal in both quarterly earnings calls and his appearances at advertising conferences about rival groups not reporting revenues transparently.
Even still, Wieser points out that none of the agency holding groups break out revenue from barter, cash rebates, consulting, media agency research fees, the booking of business from media inventory banks, or trading with equity investees.
Wieser believes that clients' scrutiny of the fees they are being charged by their agencies "will surely expand" as trading practices are explored in greater depth — presumably this means by their own procurement divisions, the press, or trade bodies.
He warns:
All of this may ultimately cause only an imperceptible difference in growth, but as marketers become more vocal about undisclosed rebates and more specific allegations come to light, a drumbeat of negativity will build around the sector over the course of this year. Given this risk, we’d recommend that investors move to the sidelines or exit the sector altogether while it all plays out.
Beyond the rebate issue, the note suggests other risks in the sector include: Squeezing fees from clients, competition from adjacent industries, and reduced competition between marketers and demand for other advertising services.
Here are the specific Pivotal downgrades:
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