publicis-omicronThe merger of Paris-based Publicis Groupe SA and New York-based Omnicom Group Inc. announced Sunday not only creates the world’s largest advertising agency, but also is one of the year’s biggest M&A deals, with a combined market capitalization of $35 billion. Publicis CEO Maurice Levy and Omnicom CEO John Wren say the link up allows them to have “a different level of conversation” with companies like Facebook and Google, which have access to large amounts of data on consumer preferences. The two men will be co-CEOs for the first 30 months.

Creating a data analytics-led ad agency makes sense, since advertisers increasingly are targeting customers directly using data from Facebook, Google and Twitter, while bypassing traditional advertising agencies. However, a merger may not be the best route to get there, and the merged entity faces several challenges, say Jerry (Yoram) Wind, Wharton professor of marketing and director of the SEI Center for Advanced Studies in Management, and John Kimberly, Wharton management professor.

The combined Omnicom-Publicis entity gets the “bragging rights” of being the world’s largest agency, and the one with the most Effie awards for marketing communications, says Wind, who co-leads the Wharton Future of Advertising Program. However, he suggests that the merger was driven by a desire to be bigger and win favor on Wall Street. For sure, investors cheered the merger as stock prices for the two companies hit all-time highs for a short period, before settling back modestly.

But Wind has doubts.  Most M&A deals between holding companies have provided “little benefit to the advertiser or the ultimate consumer,” Wind says. “They have not been able to offer an integrated creative brand story through all touch points [like] old and new media, product and package design, retail experience, sales force, etc., nor have they been able to address the advertisers’ call for more accountability and greater ROI [returns on investment] on advertising dollars.”

The new agency must have “the courage to change the mental model of the holding companies and the resulting business and revenue models” to have a positive impact on advertisers or consumers, Wind adds. Further, the co-CEO structure has failed across industries to demonstrate successfully “the ability to introduce breakthrough innovations.”

Questioning the Merger Option

Wind agrees that the growth of Big Data and analytics and the subsequent ability to deliver “targeted, customized, on demand, relevant and timely advertising” has become the new reality for advertising agencies. “This trend offers both a threat to the agencies that ignore it and an opportunity to those that adopt it.” But he does not see “a costly merger” as the only way to blend creativity and big data.

He would have recommended a more logical strategy: Each agency could have acquired specialized Big Data and analytics firms, or formed strategic alliances with companies like IBM. Those moves would have created an ecosystem where independent developers could build relevant applications, similar to what Apple has done with apps for its devices, and foster open innovation.

Wind doubts whether advertisers “will ever perceive [the merged entity] as having the credibility of IBM, Facebook and other Big Data and analytics specialty firms.” Further, transforming from ad agencies to a data and analytics company is “a huge task” he says. “[It is] very risky, costly and requires enormous courage from the leaders.” In addition, post-merger integration challenges will distract attention from that objective.

The chief reasons mergers often don’t take include incompatible cultures, failure of post-merger integration, a focus on short-term cost savings, and too much internal disruption and conflict that lead to a loss of customer focus, according to Wind.

Surviving a Merger

Kimberly, whose research specialties include organizational change and organizational design, lists the issues the merged firm must address to succeed. The rhetoric about a “merger of equals” is first on his list. “Many, if not most, mergers are awash in this rhetoric at the time the deal is announced, but the reality once the deal is done and the process of integration begins is typically very different. Key positions in the combined entity need to be filled, and the way to track who the ‘winner’ is to see who gets these positions. This game of musical chairs begins at the very top of the new organization and cascades down.”

The second issue involves the name of the merged entity. “Will one of the two former names be used, will both be used or will some third, brand new, name be used?” asks Kimberly. It appears that with Omnicom-Publicis, both legacy names will stay and are nominally in alphabetical order. “This indicates that Levy and Wren are trying hard to be consistent with the ‘merger of equals’ rhetoric,” Kimberly notes. A new name (such as Aventis in the Rhone Poulenc/Hoechst merger) would be neutral and have fewer win/lose interpretations attached, he adds, but would cause a loss of brand recognition and brand equity.

Third on Kimberly’s list: the location of corporate headquarters. That is “particularly delicate” because one party is American and the other is French. Locating in one of the countries might signal a winner, and both employees and clients read these signals. Early indications are that the Netherlands, a neutral site, will be the home of the merged entity, but it is important to see if that location is “real or “largely symbolic,” Kimberly says. Further, building a meaningful corporate presence in a third country is an expensive proposition.

How the employees of the two firms “join up — if they do at all” is the fourth issue. “All talk about synergies is meaningless if one plus one isn’t greater than two, and it is in how a culture of collaboration/common cause is established that will determine how well this issue is dealt with,” Kimberly states. Until this week, the companies were head-to-head competitors. Suddenly, they are on the same team. “How will this play out?”

Kimberly notes that employees of the two firms cannot “join up” around a third, neutral name because the original legacy names are retained. “Watch out — this issue can derail the strategic intent of the merger,” Kimberly warns. “It’s one of the key reasons so many mergers fail to deliver on the pre-merger hype.”

He agrees that Big Data and sophisticated data analytics “create extraordinary opportunities to pursue ever-more fine-grained marketing strategies.” However, “there is no template for how to do this … and new skill sets and new operating procedures will be required,” Kimberly points out.

In building those new strengths, Wind says the new entity must not ignore its creative storytelling strengths. “The evidence is growing that creativity pays. Ignoring it for the benefit of efficiency will be detrimental to the survival of any full-service agency.”