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London - The proposed $35bn merger between US-based Omnicom Group and France's Publicis Groupe SA has been called off as the obstacles to moulding the two rivals into the world's largest advertising agency proved too much.
The deal, heralded in July as a merger of equals that would enable the two agencies to compete more effectively in the digital arena, foundered on issues ranging from its complex tax structure to the firms' divergent cultures.
The two sides were also losing major clients - more than $1.5bn in the past month alone - and did not want to let the uncertainty continue.
"There was no one factor," Omnicom Chief Executive John Wren (61), told Reuters.
"There are a lot of complex issues we haven't resolved. There are strong corporate cultures in both companies that delayed us for reaching an agreement.
There was no clear finish line in sight, and uncertainty is never a good thing when you are in the personal service business."
Publicis CEO Maurice Levy said a power struggle between the partners, including over who would serve as chief financial officer, also played a role in the breakdown.
"I was very attached to the concept of equality and was not ready to cede on this point," said Levy on Monday.
"Omnicom wanted their people to fill the CEO, CFO and general counsel jobs. I thought that went too far. I thought Publicis needed to fill the CFO job to preserve the equilibrium and ensure that our business model continued."
Choice of CFO
The choice of CFO would have influenced whether the new company inclined towards a centralised structure to manage costs, which Publicis argues has driven its higher margins, or Omnicom's more devolved approach to subsidiaries.
Neither company will pay a termination fee and they will split the costs of the failed deal, such as legal fees.
Publicis shares were up 1.25%, reflecting relief that the uncertainty was in the past and an acrimonious marriage was avoided.
Shares in Britain's WPP, which will keep its crown as the world's largest agency now that its rivals are staying independent, were up 1%. Smaller French player Havas , seen as a takeover target, jumped 3.4%.
Analysts predicted a period of turmoil ahead for the industry as Publicis and Omnicom seek to re-engage with clients after recent business losses.
"We see the consequences for the agency space as negative as, shorter-term, it is likely to lead to a more competitive environment and, longer-term, it dashes the hopes that the merger would lead to an easing of pressures in staff costs and client fees," wrote Liberum analyst Ian Whittaker.
Some also said further deals could crop up, with fourth-largest agency Interpublic also tipped as a target.
Although Levy still believes Publicis should be bigger to cope with the way technology is changing the ad business, he demurred on whether the group needed a big acquisition.
"For now, our goal is simple - to accelerate our strategic plan," he said.
Marriage
Publicis and Omnicom had justified the marriage as a way to provide scale and capital to cope with technological forces reshaping the industry.
Wren and Levy, who toasted the tie-up with champagne in Paris last summer, had said it would enable them to better compete with the likes of Google Inc and Facebook, which dominate digital advertising, an area that accounts for nearly a quarter of global marketing spending.
The planned merger had called for a 50-50 ownership split of the equity in the new company, Publicis Omnicom Group, with Wren and Levy serving as co-CEOs for 30 months from the closing.
Signs of trouble between Omnicom and Publicis appeared in late April when Wren disclosed hurdles to getting the deal's tax structure approved by regulators in Europe.
He ominously said he could not predict when the deal would close and said there was "no Plan B" if the tax issues were not resolved.
Soon after, media outlets reported that the fight over the leadership of the future group had frayed relations between the two sides.
One person on the French side said Omnicom appeared less willing to compromise in recent weeks than Publicis, which was trying to save the deal.
Levy had previously postponed retirement plans as succession at Publicis remained an open issue prior to the deal. Those questions are likely to come to the fore again.
Brian Wieser, a senior analyst at Pivotal Research, said that though the potential merger was handled badly, there was still pressure on ad agencies to strike deals as they were squeezed by clients looking to cut costs.
"M&A and consolidation is still on the table, but now there are more potential flavours," he said.
He said Publicis was still a more likely a buyer than a seller, and Interpublic a more likely seller.
"The question is not whether or not there will be bids, but at what price Interpublic would sell, especially considering it should have a strong year on an operating basis."
