A US$31b ad deal shows the Mad Men are scared

BIG deals are risky in most industries but especially in advertising – that’s why it’s so rare to see the so-called Mad Men give them a go. But the antitrust environment is easing, and the traditional marketing business is under pressure. Hence, Omnicom Group is buying the Interpublic Group of Companies to create a new world No 1 in advertising. See it as one of the most obvious reactions to more benign conditions for dealmaking expected under a Donald Trump presidency.

On a narrow view, Omnicom is opportunistically swooping in on an underperforming peer. In late 2021, the firms had roughly the same stock market value. Since then, Omnicom has been a roll while Interpublic has found it harder to attract and retain clients. At US$20 billion, Omnicom’s market capitalisation was nearly twice Interpublic’s before the Wall Street Journal reported takeover talks this past weekend, enabling it to pursue a deal from a position of strength.

The all-stock terms offer Interpublic investors a premium exceeding 20 per cent, valuing their company at US$13 billion based on Omnicom’s closing price on Friday (Dec 6). Omnicom chairman and chief executive officer John Wren retains his position, as does his chief financial officer.

The bigger picture is nevertheless hard to ignore. Gone are the days when ad agencies just made billboard posters and short videos, identified where to place them, and left clients guessing whether this was driving sales. Today, the big tech platforms vie for marketing dollars. Robust data on marketing effectiveness is critical to winning clients, while artificial intelligence (AI) brings threats and opportunities to a business founded on creativity. Against that backdrop, the deal has a defensive feel. Dealing with what Wren calls an “AI-driven future” requires hefty spending on technology.

The cost savings on offer – US$750 million annually, mostly coming as soon as two years after the deal’s close – are immense relative to the premium and Interpublic’s US$1.5 billion operating profit last year. They could be ploughed back into investment. The transaction also reduces Omnicom’s leverage thanks to Interpublic being relatively less indebted and no cash being paid.

But has Omnicom got a steal? It’s worth recalling the reasons why advertisers usually avoid deals of this size.

First, antitrust. The duo will have a near-50 per cent share of the US market held by the top five players, according to analysts at Citigroup Inc. That should trigger scrutiny. Prolonged negotiations with trustbusters, or a drawn-out probe, would create uncertainty that hampers efforts to retain the best staff.

Omnicom sounds relaxed about the risks of a block, explicitly citing a likely more friendly US merger control regime. This is also a fragmented industry even if this transaction increases concentration at the top end of the marketing sector. Maybe clearance will come – but the journey may not be plain sailing.

Next, client and talent retention. The agencies will have clients that compete. The risk is that they would just go to another agency. This is a people business, and ramming together two different cultures is more likely to create friction than happy families – however much the firms claim to share the same values. Recall that Omnicom’s attempted deal with Publicis Groupe, unveiled in 2013, collapsed amid disagreement at the very top.

So if this tie-up has more chance of getting a green light than it did before Nov 5, taking advantage of granted clearance won’t be easy. The combined market value of the betrothed companies was barely changed in a flattish market on Monday, with Omnicom dipping and Interpublic gaining sympathy with the deal terms. It seems investors fear the hazards will offset the benefits, reducing the transaction to a simple transfer of value from one side’s shareholders to another’s.

Publicis has pulled away from rivals in recent years. It now faces a more formidable competitor. Others, such as London-listed WPP, a potential target for private equity, and the Havas marketing business being spun out of Vivendi, will need to consider their response to the challenges being addressed here. The fact is that scale increasingly matters in the industry, and Omnicom’s unusual move deserves the benefit of the doubt.