Publicis and Omnicom: Why 'mergers of equals' fail

By combining, the two advertising giants are staking out ground that has crossed up plenty of previous such deals.

By Jonathan Berr Jul 29, 2013 12:16PM
Maurice Levy, left, Chief Executive of French advertising group Publicis, and John Wren, head of Omnicom Group exchange a pencil during a joint signature prior to a news conference in Paris, France, Sunday, July 28, 2013 (© Francois Mori/AP)Whenever companies announce "mergers of equals," such as the deal between advertising giants Publicis and Omnicom (OMC), investors should be suspicious.

First, often when companies use the term when announcing their deals, it's a bunch of hooey meant to obscure the fact that one company is buying another. The Publicis-Omincom merger, however, is meant to be the real thing.

Under the terms of the transaction, each advertising firm's shareholders will end up owning 50% of the new company. Publicis CEO Maurice Levy and his counterpart at Omnicom John Wren (left and right, respectively, in picture) will be co-CEOs of the company, which will be based in both Paris (Publicis' home) and New York (where Omincom is headquartered).
 
But as The Wall Street Journal noted, the track record for "mergers of equals" lags those where one company outright buys another one. There are scads of examples. Three years later after France's Alcatel and U.S.-based Lucent merged, Alcatel Lucent (ALU) took a $5.1 billion write-down. The stock now trades at about $2.11.

An even bigger disaster was the 1998 pairing of Germany's Daimler and U.S. automaker Chrysler. Daimler wound up having to spend $650 million to extricate itself from its ownership stake in the-then beleaguered automaker. Chrysler is now thriving under its current owner Fiat (FIATY).
 
Corporations aren't democracies. Someone has to be in charge, otherwise there's chaos or "paralysis by analysis." Co-CEOs have to spend an inordinate amount of time worrying about how to achieve "balance." It also can be quite an undertaking for CEOs who are used to calling the shots to learn how to work with someone of equal rank.

Levy and Wren argue that advertising is uniquely suited to this kind of corporate structure because the ad agencies each company owns compete against their corporate siblings for some business, while they collaborate in other cases.  

In an interview with CNBC, Levy said the reaction from clients to the deal has been "overwhelming and extremely positive." Added Wren: "There are some hard choices that have to be made."

It shouldn't take too long to find out whether their positive spin is proven right.

The problem that Publicis and Omnicom face is the same one households with multiple pets have to deal with: If you pet your dog, you need to pet your cat. Otherwise, you're asking for trouble.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.

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