Omnicom (OMC) / Publicis Cultures May Clash in Two Areas, Says Goldman

July 29, 2013 9:24 AM EDT
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On Monday Omnicom Group Inc. (NYSE: OMC) and Publicis Groupe SA announced that they have signed a definitive agreement for a merger of equals, creating the world’s leading company in communications, advertising, marketing and digital services, with combined 2012 revenue of $22.7 billion / €17.7 billion.

Commenting on the deal, analyst Goldman Sachs analyst Drew Borst said, "Management expects $500 mn in annual costs saving within 5 years . . . Client conflicts (e.g., Coke and Pepsi) could result in dis-synergies; however, the increased scale of PUB-OMC helps mitigate the risk, as the largest client accounts for ~1.5% of PF revenue and ~3% of PF EBIT."

Borst noted digital was an area where the cultures may clash.

"On digital, PUB has been acquiring stand-alone digital agencies (e.g., Digitas, Razorfish) and continues to run them independently. OMC built digital into its large agencies, opting for an integrated approach. It is unclear which method its clients prefer or which strategy the new company will employ," said the analyst.

Capital allocation is another area where companies differ.

Regarding the company's peers, the analyst said, "We expect agency holding companies (WPP, IPG (NYSE: IPG) and Havas) could pick-up new business resulting from client conflicts and trade-up amidst consolidation speculation. The market may shift attention to IPG and Havas as consolidation targets, given that both could benefit from margin improvement via increased scale in select media markets,"

Goldman Sachs has a Neutral rating on Omnicom Group

For an analyst ratings summary and ratings history on Omnicom Group (NYSE: OMC) click here. For more ratings news on Omnicom Group click here.

Shares of Omnicom Group closed at $65.11 yesterday.

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