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It’s an end-of-year shake-up for adland: The third largest agency holding company, Omnicom, announced plans to acquire the fourth largest agency holding company, IPG, yesterday morning. The combination will have Omnicom leapfrog Publicis and WPP to become the world’s largest holding company, together accounting for $25 billion in annual ad revenue and over 100,000 employees, should the acquisition be approved by regulators.
Consolidation has been the name of the game for some time for holding companies albeit at a much smaller scale. Think Dentsu Creative, Omnicom Advertising Group, VML, to name a few. There’s been a push to combine agencies (sometimes doing away with agency brands), find efficiencies where possible (like back office overlap) and use the scale of a bigger shop to woo advertisers. The push to do so is expected to continue with this acquisition.
“There’s going to be blood,” said one ad agency exec who asked for anonymity. “There’s gonna be a lot of consolidation as a result. Creative agencies, PR agencies, they’re going to push them together like VML or whatever that agency’s called now, right? That’s gonna mean redundancies in the back office can be addressed very quickly. The amount of savings that comes from that — they’re gonna cut like a meaningful percentage of operating cost; you don’t need two CFOs, you don’t need two art departments, etc. — is probably about 30% of the staff from both sides.”
That being said, any cuts could be a ways off. The acquisition has to be approved by regulators. Sorting out the overlaps, the redundancies and the efficiencies as well as the benefits of the scale once they have that approval will be the first order of business for the leadership teams. Consolidation of agencies will be a second order effect.
For their part, it seems Omnicom and IPG want to soothe worries about consolidation in the interim. During the call announcing the acquisition plans, Omnicom CEO John Wren said, “Each of our two organizations has exceptionally talented people who are recognized every year for their creativity, innovation and effectiveness. Omnicom will remain committed to being the home for the best talent in the industry, and this transaction will create many new opportunities for our teams.”
Wren continued: “As one company, we will have a unique ability to bring our clients expert town for their specific needs, wherever they are in the world.”
However, the cost of the acquisition may make that difficult. Wren also noted that acquiring IPG will come to the tune of $450 million to close and get to the expected $750 million in “cost synergies” that makes the deal appealing.
In the meantime, there’s a sense from some in the industry that this acquisition was bound to happen and necessary for survival, especially to compete with Publicis and WPP more seriously. Others worry that big isn’t always better. Keep reading to get a sense of the landscape — both for and against — this acquisition.
The case for the acquisition
We’re currently in a “bundling phase” in the industry, explained the exec, and this is the biggest bundle we’ve seen yet. The acquisition will reduce the number of competitors — which some see as a good thing as there have been myriad players and not enough differentiation between those players — and increase the scale for Omnicom. They’ll get bigger and have the opportunity to be more competitive.
“Scale matters,” said Allen Adamson, co-founder of brand consultancy Metaforce, adding that the case for scale is one that only really matters when you’re the biggest. “If you’re big but you’re not the biggest you’re not gonna win the scale game.”
The move also allows Omnicom to grow which will likely please shareholders and Wall Street. “Getting organic revenue growth in the ad business is incredibly difficult,” said Adamson. “If you’re not growing, the only way to keep Wall Street happy is to cut costs.”
Adamson continued: “If you’re bigger, it provides more opportunities to find efficiencies of scale. You can mush companies together like WPP has been doing, take out multiple CFOs or HR departments or leverage real estate and technology. There are more ways to squeeze margin out of lots of little companies than out of one big company and since they’re [likely going to] combine a lot of small agencies it opens the playing field up to find ways to drive efficiencies and margin to enhance market value.”
One major focus on enhancing market value: Combining the scale of their technology offerings (think Omnicom’s Flywheel, IPG’s Acxiom and the like) as well as their media business. While Omnicom and IPG did highlight the combination of their technology businesses on their call announcing the merger on Monday, they didn’t share much about how the potential of their combined media businesses could benefit them and their clients.
Even so, “if you’re a client or a marketer, I think it would be important to focus on the investment forefront,” said Jay Pattisall, vp and senior agen