Failed Merger Leaves Holes for Ad Giants

Updated May 9, 2014 10:05 p.m. ET

The chief executives of


Publicis Groupe SA



PUB.FR -0.81%



Publicis Groupe S.A.


France: Paris


60.20


-0.49
-0.81%



May 9, 2014 5:35 pm

Volume :
4.75M




P/E Ratio
17.00

Market Cap
€12.84 Billion


Dividend Yield
1.48%

Rev. per Employee
€111,154









05/09/14 Failed Merger Leaves Holes for…
05/09/14 Podcast: Epic Fail, and Epic I…
05/09/14 U.K.’s Tax Shift Wins Favor in…
More quote details and news »



and


Omnicom Group Inc.



OMC +2.21%



Omnicom Group Inc.


U.S.: NYSE


$67.66


+1.46
+2.21%



May 9, 2014 4:01 pm

Volume (Delayed 15m)
:
11.93M



AFTER HOURS



$67.66


0.00
0.00%


May 9, 2014 4:27 pm

Volume (Delayed 15m):
352,025




P/E Ratio
18.04

Market Cap
$17.49 Billion


Dividend Yield
2.36%

Rev. per Employee
$204,565









05/10/14 What’s News: Business & Financ…
05/09/14 Failed Merger Leaves Holes for…
05/09/14 Podcast: Epic Fail, and Epic I…
More quote details and news »



sought Friday to reassure investors, clients and employees of their stand-alone strategies after abandoning their $35 billion megamerger.

Both Publicis Chairman

Maurice Lévy

and Omnicom CEO

John Wren

dismissed concerns they had lost clients because of nine months of distraction around the deal, which unraveled late Thursday amid disputes over positions and power, as well as difficulties in getting tax and other regulatory approvals.

“We decided it was better not to go to the church, rather than end before a judge,” Mr. Lévy said, adding that “it is not a merger of equals if you have a CEO, CFO and general counsel only from one side.”

For his part, Mr. Wren said the challenges were “corporate culture, complexity and time.”

“I know now that we underestimated the depth of these differences,” Mr. Wren added, noting that cultural differences made it difficult to make major operating decisions.

The companies called off the deal late Thursday in what they said was a mutual decision. Announced with much fanfare in late July, the megamerger would have created the world’s largest ad holding company by revenue, combining ad agencies such as BBDO, Saatchi & Saatchi, DDB, Leo Burnett and TBWA as well as public-relations firms including FleishmanHillard and Ketchum, and digital-ad agencies DigitasLBi and Razorfish.

The breakup puts both companies at a strategic crossroads. Both argued when laying out their merger plans last year that advertising companies need big scale to compete with the likes of Google Inc. and Facebook Inc., and to match their investment in new data-heavy promotional technology. Now that the deal is off, both have to wrestle with gaining that scale as stand-alone groups, analysts said.

“There is no easy substitute for this deal,” said Claudio Aspesi, an analyst at Sanford C. Bernstein. “It’s still an open question how Publicis and Omnicom will pursue the scale they both knew they needed.”

Shares of Publicis slipped 1%, while Omnicom gained 2.2% in Friday’s trading.

Mr. Lévy said his company would continue to bulk up in the digital arena but added that for now Publicis had no plans for a large acquisition.

“We are back to a new start,” Mr. Lévy said, adding the merger had never been a necessity for either group but would have been a “formidable opportunity.”

For Omnicom, the deal’s abandonment will put a spotlight on Mr. Wren’s digital strategy—and particularly his preference on building digital capabilities internally rather than buying up digital marketing firms the way Publicis and the biggest ad-holding company, WPP PLC, have done over the past few years.

For example, Publics has acquired digital marketing firms such as LBI, Digitas and Razorfish. Meanwhile, WPP gobbled up 24/7, AKQA and a long list of smaller digital companies around the globe.

Mr. Wren, however, has been unwilling to pay premium prices that many digital companies fetch, analysts say. On a conference call on Friday, Mr. Wren acknowledged the company has been prudent when it comes to acquisitions, but said digital “is an area that we’ve identified that’s of interest to us in the future.”

He added that the company’s digital strategy is “either not fully understood or underappreciated…We have always believed that anything that can be digital will be and that means pretty much everything we do,” Mr. Wren said.

Mr. Wren said the company has no material or large deals that it is contemplating in the near future. He added the company will continue to make significant internal investments.

The uncertainty about the merger over the past few months has taken its toll on morale inside both companies, people familiar with the companies said. One top Omnicom executive recently said the nine months’ planned marriage had stalled some internal plans that some agencies were contemplating. It has been almost “a year of treading water,” the executive said.

Several Publicis executives had complained about a lack of communication from top management about the merger. One said that left staffers in awkward positions with clients asking for merger updates.

“The more this carries on the more our clients get p— off,” said another Publicis executive last week.

While Mr. Lévy insisted that Publicis agencies have remained focused on their client relationships throughout the past nine months, he admitted that he himself had become absorbed by the task to complete the deal. “I have been out of focus, concentrating on the merger,” Mr. Lévy said. “But I assure you I am back in focus.”

The failure of the merger is a strategic setback for both groups after Messrs. Lévy and Wren had touted the advantages of scale. It also robs Mr. Lévy of a final coup of his career and reopens the question of who will eventually replace the 72-year-old executive at the head of the French company.

Mr. Lévy said Publicis’s supervisory board would address the successor issue soon, probably before September.

Publicis has lost several top executives over the past few years and people familiar with the company said that Mr. Levy will have to beef up upper management. Among the moves he will have to make is to find a successor to

Kevin Roberts,

the 64-year-old chief of Saatchi & Saatchi, according to two Publicis executives. Mr. Roberts couldn’t be reached for comment but a spokeswoman for the executive said he has “no plans to retire” and there is always a succession plan in place.

Write to Ruth Bender at Ruth.Bender@wsj.com, Nathalie Tadena at nathalie.tadena@wsj.com and Suzanne Vranica at suzanne.vranica@wsj.com

  Click to listen highlighted text! Updated May 9, 2014 10:05 p.m. ET The chief executives of Publicis Groupe SA PUB.FR -0.81% Publicis Groupe S.A. France: Paris €60.20 -0.49 -0.81% May 9, 2014 5:35 pm Volume : 4.75M P/E Ratio 17.00 Market Cap €12.84 Billion Dividend Yield 1.48% Rev. per Employee €111,154 05/09/14 Failed Merger Leaves Holes for… 05/09/14 Podcast: Epic Fail, and Epic I… 05/09/14 U.K.’s Tax Shift Wins Favor in… More quote details and news » and Omnicom Group Inc. OMC +2.21% Omnicom Group Inc. U.S.: NYSE $67.66 +1.46 +2.21% May 9, 2014 4:01 pm Volume (Delayed 15m) : 11.93M AFTER HOURS $67.66 0.00 0.00% May 9, 2014 4:27 pm Volume (Delayed 15m): 352,025 P/E Ratio 18.04 Market Cap $17.49 Billion Dividend Yield 2.36% Rev. per Employee $204,565 05/10/14 What’s News: Business & Financ… 05/09/14 Failed Merger Leaves Holes for… 05/09/14 Podcast: Epic Fail, and Epic I… More quote details and news » sought Friday to reassure investors, clients and employees of their stand-alone strategies after abandoning their $35 billion megamerger. Both Publicis Chairman Maurice Lévy and Omnicom CEO John Wren dismissed concerns they had lost clients because of nine months of distraction around the deal, which unraveled late Thursday amid disputes over positions and power, as well as difficulties in getting tax and other regulatory approvals. “We decided it was better not to go to the church, rather than end before a judge,” Mr. Lévy said, adding that “it is not a merger of equals if you have a CEO, CFO and general counsel only from one side.” For his part, Mr. Wren said the challenges were “corporate culture, complexity and time.” “I know now that we underestimated the depth of these differences,” Mr. Wren added, noting that cultural differences made it difficult to make major operating decisions. The companies called off the deal late Thursday in what they said was a mutual decision. Announced with much fanfare in late July, the megamerger would have created the world’s largest ad holding company by revenue, combining ad agencies such as BBDO, Saatchi & Saatchi, DDB, Leo Burnett and TBWA as well as public-relations firms including FleishmanHillard and Ketchum, and digital-ad agencies DigitasLBi and Razorfish. The breakup puts both companies at a strategic crossroads. Both argued when laying out their merger plans last year that advertising companies need big scale to compete with the likes of Google Inc. and Facebook Inc., and to match their investment in new data-heavy promotional technology. Now that the deal is off, both have to wrestle with gaining that scale as stand-alone groups, analysts said. “There is no easy substitute for this deal,” said Claudio Aspesi, an analyst at Sanford C. Bernstein. “It’s still an open question how Publicis and Omnicom will pursue the scale they both knew they needed.” Shares of Publicis slipped 1%, while Omnicom gained 2.2% in Friday’s trading. Mr. Lévy said his company would continue to bulk up in the digital arena but added that for now Publicis had no plans for a large acquisition. “We are back to a new start,” Mr. Lévy said, adding the merger had never been a necessity for either group but would have been a “formidable opportunity.” For Omnicom, the deal’s abandonment will put a spotlight on Mr. Wren’s digital strategy—and particularly his preference on building digital capabilities internally rather than buying up digital marketing firms the way Publicis and the biggest ad-holding company, WPP PLC, have done over the past few years. For example, Publics has acquired digital marketing firms such as LBI, Digitas and Razorfish. Meanwhile, WPP gobbled up 24/7, AKQA and a long list of smaller digital companies around the globe. Mr. Wren, however, has been unwilling to pay premium prices that many digital companies fetch, analysts say. On a conference call on Friday, Mr. Wren acknowledged the company has been prudent when it comes to acquisitions, but said digital “is an area that we’ve identified that’s of interest to us in the future.” He added that the company’s digital strategy is “either not fully understood or underappreciated…We have always believed that anything that can be digital will be and that means pretty much everything we do,” Mr. Wren said. Mr. Wren said the company has no material or large deals that it is contemplating in the near future. He added the company will continue to make significant internal investments. The uncertainty about the merger over the past few months has taken its toll on morale inside both companies, people familiar with the companies said. One top Omnicom executive recently said the nine months’ planned marriage had stalled some internal plans that some agencies were contemplating. It has been almost “a year of treading water,” the executive said. Several Publicis executives had complained about a lack of communication from top management about the merger. One said that left staffers in awkward positions with clients asking for merger updates. “The more this carries on the more our clients get p— off,” said another Publicis executive last week. While Mr. Lévy insisted that Publicis agencies have remained focused on their client relationships throughout the past nine months, he admitted that he himself had become absorbed by the task to complete the deal. “I have been out of focus, concentrating on the merger,” Mr. Lévy said. “But I assure you I am back in focus.” The failure of the merger is a strategic setback for both groups after Messrs. Lévy and Wren had touted the advantages of scale. It also robs Mr. Lévy of a final coup of his career and reopens the question of who will eventually replace the 72-year-old executive at the head of the French company. Mr. Lévy said Publicis’s supervisory board would address the successor issue soon, probably before September. Publicis has lost several top executives over the past few years and people familiar with the company said that Mr. Levy will have to beef up upper management. Among the moves he will have to make is to find a successor to Kevin Roberts, the 64-year-old chief of Saatchi & Saatchi, according to two Publicis executives. Mr. Roberts couldn’t be reached for comment but a spokeswoman for the executive said he has “no plans to retire” and there is always a succession plan in place. Write to Ruth Bender at Ruth.Bender@wsj.com, Nathalie Tadena at nathalie.tadena@wsj.com and Suzanne Vranica at suzanne.vranica@wsj.com Powered By GSpeech