May 9, 2014

The failure of the $35 billion merger of equals between advertising giants Publicis and Omnicom stands as an example of how not to approach value-creation through the deal process. A year after the deal was announced – to great fanfare and excitement in a ceremony before the Arc de Triomphe – the transaction succumbed to a highly public failure.

Approximately one M&A transaction in two (~45% of deals analysed)  see pre-merger due diligence fail to identify both realisable synergies as well  the most important sources of value creation. Another significant proportion fail to tackle key leadership issues on a timely basis.

M&A deals typically fall into two buckets:

  1. “Scale” deals designed to increase sales and/ or cut costs within the context of a given market.
  2. “Capability” deals designed to add new products, competencies or corporate capabilities in new or adjacent markets
  3. “Hybrid” transactions combining elements of both, creating value through some (or all )of four inter-related processes:
    • enhance and preserve the core business through a deal that reduces sectoral competition
    • boost margins and increase competitiveness through scale
    • expand and augment a business through new capabilities
    • optimise the new firm’s position on the capital structure efficient frontier

Publicis / Omnicom clearly fit into this category. It  was designed not only to achieve scale, but also to bolster digital capabilities in an emerging era of inline advertising and big data analytics. Of course ambitious deals of this scale and nature require forethought, agreement in principle on leadership, and the addressing of key questions early in the process.

Publicis brought certain highly-regarded advertising brands (such as Saatchi & Saatchi and Leo Burnett), strong digital / internet assets (i.e. Razorfish) and a robust presence in certain emerging markets. Omnicom came with scale and a strong U.S. presence.

The scale/reduced competition element of the deal was obvious. As an industry advertising is growing at about 6% per annum (broadly the rate of inflation plus economic growth). However it is also an industry wherein internet/online advertising will surpass the volume of television advertising within two years; hence the need for an innovative approach to digital advertising.  Put another way, significant elements of the merger rationale were built around using scale to respond to technological and market change.

Setting commercial logic aside, it has been suggested that another aspect of the announcement was a simple desire to create a new firm that trumped the scale of industry leader WPP.

And yet the deal has fallen apart. Delayed tax decisions and a go-slow regulatory process in China were cited, but these do not appear to have been make-or-break issues. Rather it would appear to have come down to a combination of cultural conflict and failure to agree on key issues before signing

“We are divorcing before getting married” said the Chairman of Publicis. “We were not totally in agreement, to put it mildly, on how to share responsibility”. “

“We underestimated the cultural differences…” said Omnicom’s CEO.

The first, and perhaps most striking, issue that helped scupper the proposed transaction was failure to agree on senior leadership roles. It could be assumed that something as basic as this would have been negotiated prior to signing a binding LOI and announcement; yet in this instance a great deal of ambiguity remained.

Publicis is led by M. Maurice Levy, a 71 year old who with a reputation for combining the urbane and cultivated with cunning business skills. Omnicom’s CEO, Mr John Wren, a strong-willed 60-year old, and he had agreed to remain co-CEOs for 2 ½ years before Mr Wren would assume sole operational control and M. Levy would become non-executive Chairman. Other key positions, such as the CFO role, were left undefined. Apparently Publicis balked when Omnicom proposed that its CFO remain in place: to Publicis this would have smacked of an Omnicom takeover.

In fact it is reported that Publicis wanted to provide much of the senior executive team. Their rationale was based around the argument that they had better margins and a superior and more sustainable operating model.

Not having set some key issues such as this in concrete prior to (or early in) the merger process created an opportunity for rivals. As Omnicom and Publicis focused inwards and became increasingly concerned with merger politics key clients were poached by, amongst others, WPP.

A key lesson of this episode may therefore be to understand what issues are “red lines” and should therefore be negotiated up front. This can avoid public failure as well as significant and unnecessary internal stress and distraction.

Some key deal process issues highlighted by Publicis/Omnicom therefore include:

  • identify key issues early in any substantial merger discussion
  • create teams (with a board mandate to make decisions) specifically focused on integration – insulate and protect the day-to-day business from merger-related stresses
  • strive for as short a period as possible between public announcement and closing:
  • ensure that pre-deal planning maps out essential commercial and structural issues that need to be resolved prior to closing: hard work prior to signing a binding LOI can pay dividends later
  • ensure that both sides both subscribe to a common vision as well as share an appetite to close and execute the jointly-developed business plan
  • develop milestones for measuring progress post-closing in order align aspirations, interests and schedules for realizing value