Merger Expected to Create Media Buying BehemothUPDATED: Omnicom-Publicis combo would control 40% of national TV spending in U.S. 7/27/2013 11:58:19 PM Eastern
UPDATED at 7:14 p.m. ET
Advertising and media buying giants Omnicom and Publicis Groupe announced a deal to merge, forming Publicis Omnicom Group.
The deal creates a company that controls what some executives estimate is as much as 40% of every dollar spent on national TV in the U.S. It remains to be seen how well coordinated the buying activities of the agencies under the new holding company will be.
In the media agency business, Publicis' key brands are Mediavest, Starcom and Zenith. Omnicom's media agencies are OMD and PHD.
Currently GroupM is the biggest media buying company, with about a 25% share of national TV spending. That might not be good news for those who sell advertising.
"The combination of Publicis and Omnicom has negative implications on media owners whose revenue base is skewed towards advertising and especially those whose advertiser base skews towards large brands," said Brian Wieser, analyst at Pivotal Research. "The impact of the transaction on the media industry will likely be profound in ways that many observers have not fully considered as of yet. This is because of the ways in which we think the entity may change its media buying practices and the follow-on impact on the rest of the eco-system."
The most negatively impacted media owners will include CBS, Scripps Networks and Discovery Communications, Wieser says, because the majority of their revenue comes from advertising-and the bulk of that advertising comes from large brands serviced by agencies of increasing size.
"Sheer size hasn't always translated into real buying clout," Wieser says. Recently, GroupM has been able to put together a top-down approach that allows it to "optimize its negotiating strategies and arguably, pay less for like-for-like inventory than its competitors," he says. "The tradeoff, in the view of marketers, was always the degree to which you accepted low prices vs. (for lack of a better word) customized solutions."
Wieser says he expects the combined Omincom and Publicis to emulate GroupM. "We think that this will mean that spending representing the bulk of the market will be materially better positioned to play off media owners against each other, as they will each maintain a greater ability to walk away from negotiations than would otherwise be the case," he says. "There will still be unique media properties such as sports programming that are ‘must-have' and which specific clients want. But we see it getting incrementally harder for media owners to bundle those properties with inventory that marketers are going to be increasingly indifferent towards."
"The giant media buyers will be better positioned to pick winners and losers in ad tech," Wieser says. Those merging platforms and systems "will all now have two big customers accounting for the bulk of activity in some verticals, making a shake-out more likely."
Wieser says other advertising and media agency groups are likely to be involved in deals to further consolidate the business, including IPG being acquired by WPP. "What would have been unthinkable previously would now make sense," Weiser said.
The consolidation in the agency business comes as the cable industry is considering mergers to increase their scale and coordination, led by John Malone, who acquired control of Charter Communications and has been eyeing a takeover of Time Warner Cable.
At the same time, some analysts expect media companies to consolidate as well. In a recent report, analyst Laura Martin of Needham & Co. said that with competition from premium online video streaming companies like Netflix putting pressure on profit margins, television companies including Scripps Networks Interactive, Discovery Communications, CBS and Viacom could be sold. She said the most likely buyers are Disney, Time Warner and 21st Century Fox.
If the deal goes through, it would have revenues of $22.7 billion and a market capitalization of $35.1 billion. Omnicom CEO John Wren and Publicis CEO Maurice Levy would become co-CEOs.
"The communication and marketing landscape has undergone dramatic changes in recent years including the exponential development of new media giants, the explosion of Big Data, blurring of the roles of all players and profound changes in consumer behavior. This evolution has created both great challenges and tremendous opportunities for clients," Levy said in a statement. "John and I have conceived this merger to benefit our clients by bringing together the most comprehensive offering of analog and digital services. Equally important, it will offer our talented people new avenues for growth and success at the crossroads of strategic intelligence, creativity, science and technology."
Wren added that "Both Maurice and I believe this new company reflects our vision of retaining the best talent, attracting an incredible roster of clients and leading innovation. Omnicom and Publicis Groupe are reshaping the industry by setting a new standard for supporting clients with integrated messaging across marketing disciplines and geographies. This combination will enable us to leverage the skills of our exceptionally talented people, our broad product offering, enhanced global footprint, and tremendous roster of global and local clients. In short, we believe this is a merger that will set our new company on a path to accelerated growth, with long-term benefits for clients, employees and shareholders."
The transaction is subject to approval by the shareholders of both companies as well as numerous regulatory approvals. It is expected to close in the fourth quarter of 2013 or the first quarter of 2014, the companies said.
Wieser suggests the deal could have antitrust hurdles in the U.S. given that the combined company would control for almost 40% of the industry and that TV programmers like CBS and Discovery would face the prospect of the new company plus WPP controlling two-thirds of their revenues, it might pass muster with U.S. regulators it pitched as being more competitive with Accenture, Salesforce.com or IBM.
Jeff Chester, executive director of the Center for Digital Democracy (CDD), said his group would be encouraging his colleagues to look into the antitrust issues. "There is a question over data and privacy, which needs to be raised in terms of digital advertising," he said. In addition, the proposed deal needs to be examined in light of the increasing consolidation of the ad industry.
CDD has been among the most active groups looking at the ad industry and privacy issues.