How the Publicis-Omnicom deal started as a jokeJuly 30, 2013: 5:00 AM ET
A Fortune exclusive on how ad giants Publicis and Omnicom came together to plot the biggest ad deal in history. And why Martin Sorrell at archrival WPP says the merger will be good for him.
FORTUNE -- It started as a joke.
Publicis (PUBGY) CEO Maurice Levy and Omnicom (OMC) chief John Wren, veteran leaders of two of the world's largest ad holding companies, had known each other for years, but this was the first time that Wren visited Levy at his Paris office. It was January, and the two titans of the ad business were chatting on Publicis's rooftop terrace, overlooking the Arc de Triomphe, when Wren said: "This is priceless."
"Not so much," Levy replied. "It can be yours."
"It was just a joke," Levy recalled in an interview with Fortune. "I had nothing in mind."
"We laughed a little," Wren says, "but it was not forgotten."
Over the next six months -- beginning with a February 4 meeting in Paris, followed by a meeting in New York last March -- the CEOs visited one another nearly every other weekend, meeting privately and secretly in hotels in both cities. Last month, during "a secret rendezvous," as Wren calls it, at the Carlton Hotel amidst the Cannes Lions international advertising festival on the French Riviera, he and Levy carved out the terms of the biggest merger in ad history. To keep the deal under the radar, Levy skipped the elevator and took the stairs to get to Wren's 6th floor hotel suite. "He got his exercise," jokes Wren.
So, it was fitting that these two bosses were back on the roof of Publicis's Paris headquarters on Sunday when they announced their deal to form Publicis Omnicom. The merger proposes to unite Publicis, which owns Saatchi & Saatchi and Leo Burnett as well as Internet-marketing agency Digitas, with Omnicom, which houses ad giants BBDO, DDB, and TBWA. The potential benefits of the combination are massive: an enlarged global footprint, greater leverage with media companies that place ads for their clients, more clout in dealing with Google (GOOG) and Facebook (FB), which are both customers and competitors of the ad companies. With the potential benefits, though, comes one sure thing about this so-called "marriage of equals": It is going to be a very complicated marriage.
The merger is complicated, first of all, for clients, the lifeblood of the two partners. Among the client conflicts in the proposed deal: PepsiCo (PEP) has been one of Omnicom's flagship clients for decades; Publicis serves Coke (KO). No way will the beverage giants allow their brands to live under one roof -- particularly this roof of never-seen-before proportions. Other conflicts for Publicis Omnicom to sort out: Apple (AAPL) and Samsung (SSNLF), Verizon (VZN) and AT&T (T), and several brands in the lucrative auto category.
Beyond that, global clients such as Procter & Gamble (PG) and McDonald's (MCD) that work with both Omnicom and Publicis will face the potential downside of doing business with an even bigger conglomerate. Former P&G CMO Jim Stengel points out that agencies within holding companies tend to be very competitive with each other, partly because reward systems aren't set up for collaboration. "I often found that agencies from different holding companies collaborated better," says Stengel, now a consultant with his own firm. "The promise of putting together integrated teams from holding companies to better serve clients is way more the exception than the rule. But when it works, it's magical." Examples of successful collaborations include Publicis's work for P&G's Crest and Oral B brands and WPP Group's (WPPGY) Team Ford (F).
Levy and Wren intend to be co-CEOs of the new company for 30 months, in part "to make clients comfortable" with the new set-up, Levy explains. Even so, the set-up is inherently risky. "Co-CEOs is not an easy structure," notes WPP chief Martin Sorrell, who runs the world's largest ad holding company, at least until Publicis Omnicom passes regulatory muster. (Approvals are needed in 41 countries, Wren says.) Indeed, corporate history is packed with failed co-CEOs; outsized egos typically destroy relationships and damage companies, particularly big global ones. Remember Sandy Weill and John Reed at Citigroup (C)?
The plan is for Levy to continue operating from Paris, while Wren remains in New York. Levy says they possess "exactly the same attitudes" toward serving clients, but skeptics are concerned about the balance of power. The 71-year-old Levy, who intends to hand the CEO reins to Wren, 61, after 30 months, has performed much better for investors than Wren. Benefiting from digital acquisitions and investments in emerging markets, Publicis stock has more than tripled during the past five years. Omnicom is up about 70% in the same period. While Omnicom delivered 30% annual returns in the 1990s, its slowdown suggests that Wren's strategy "wasn't working," says Sorrell.
The WPP chief calls the Publicis-Omnicom merger "an extremely bold, brave, and surprising move," and he is now salivating on the sidelines. Sorrell will likely pick up a few clients dissatisfied by the Publicis-Omnicom merger. Meanwhile, some industry watchers contend that British-based WPP, which owns JWT and Ogilvy Group, as well as PR giants Burson-Marsteller and Hill & Knowlton, could bulk up further by acquiring Interpublic Group (IPG), the owner of McCann-Erickson. Sorrell downplays his attraction. "We'd rather be the biggest by far," he admits, adding about the impact of Publicis Omnicom on WPP, "At worst, it's neutral. At best, it's highly positive. They're going to have their hands full getting regulatory approvals and trying to extract synergies."
IPG's stock rose 5% on speculation. Sorrell, a finance man to the core, is not the type to buy a company when the expectation of a deal is priced into the stock. But wait and see. If WPP would buy IPG, the combination based on 2012 revenue would be $23 billion. That's the same size as Publicis Omnicom.