Monday, August 12, 2013

Merger of Equals: A Really Bad Idea?

Last month advertising firms Publicis Groupe (PUG) of France and U.S. based Omnicon (OMC) announced a $35B MOE Merger creating the world’s largest advertising firm .The initial market response was positive with Publicis up 6% while Omnicon increased 7.7%. Synergies of $500MM are expected.

The new firm, Publicis Omnicon Group (POG), will be based in both NYC and Paris. POG will have 14 board members - 7 each from PUG and OMC. POG’s CEO and OMC’s CEO will serve as CO-CEOs of the new combined firm for 30 months. Then OMC CEO will then become CEO as PUG’s Levy is set to step down and become Chairman.

MOE share the following characteristics:

1)     Similar sized firms in the same industry
2)     Substantial portion of the new combined firm is held by each firm’s former
3)     Limited or no premium paid
4)     Stock swap using fixed exchange ratio usually with no caps/floors
5)     Sharing of governance between the two former firms-Co Equal CEOs, etc.

Point # 5 is the issue which causes the most danger in successfully implementing a MOE despite their low premium. The Co Equal structure complicates cultural integration and execution making it difficult to realize the promised synergies. M&A already is a risky activity without adding an additional layer of integration barriers. This is why MOE have a checkered record including:

1)     Daimler-Chrysler
2)     Alcatel-Lucent
3)     Citi-Travelers
4)     Morgan Stanley-Discover
5)     First Union-Wachovia

The integration issues are especially acute when the firms have different business models (e.g. Citi-Travelers) and cultures (e.g. Alcatel-Lucent).This is critical for POG regarding client conflict resolution. For example, Coke is a Publicis client while Pepsi is an Omnicon client. How do you do what is best for the client without upsetting either the Publicis or Omnicom account managers? Another issue is handling the different compensation systems - a U.S. style Omnicon and a Euro Publicis without alienating employees.

Typically, MOE are more symbolic than substantive. They are used get approval for a combinations that otherwise would not occur. For example, General Mills had to incorporate a complex governance sharing structure into its Yoplait yogurt acquisition to get French approval. Usually in a MOE, some parties turn out to be more equal than others.

The basic problem with MOEs is they work in theory but not in practice. The numbers seem to work, but the “soft” issues- people, governance and integration frequently do not work once the deal is closed. You can try to let the lawyers work it out with a detailed memorandum of understanding covering items such as:

 1)     Governance: board size, composition, key committees, management team
         compensation, and management succession.
 2)     Surviving name and HQ Location
 3)     Strategic Plan and Direction
 4)     Capital Structure, Ratings Target and Dividend Policy
 5)     Who Will Be the CFO and What IT Systems Will Be Used
 6)     Professionals: who will be the surviving accountant, lawyers, investment
         bankers, etc.?
 7)     Due Diligence
 8)     Identification and Retention of Key Staff
 9)     Investors Relations Strategy
10)    Detailed Integration and 100 Day Plans

The problem with the lawyer approach is that it inhibits flexibility needed to integrate the two firms. The focus on fairness and balance can interfere with making the right business decision. This can lead to frustration and conflict. The danger is this creates an “us v them” mentality leading to in-fighting. Remember, the two firms were formerly rivals. Thus, some bad blood among the staff is likely to exist. This may make it difficult for them to get along in any event.

I wish the Publicis and Omnicom combination the best of luck. My gut tells me this is going to be a bumpy ride. Co-CEOs and dual HQs, especially with organizations having such different cultures (French v American) raise the odds of a disappointing integration.


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