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TheStreet Open House

What Dell Bankers Can Learn From Omnicom and Publicis' Merger

Updated from 11:49 a.m. ET to include closing share prices and additional data throughout

NEW YORK ( TheStreet) -- The blockbuster $35 billion merger of Omnicom (OMC) and Paris-based Publicis (PUB ) creates an intrigue worthy of a Mad Men episode. However, the "merger of equals" among advertising industry giants may have a relevance that stretches beyond the world of Don Draper.

Omnicom and Publicis are attempting one of the largest all-stock mergers since the financial crisis, and the deal may be an early indication that C-Suites across Corporate America could begin to consider such transactions as a way to bolster their shares in coming years.

Meanwhile, as Michael Dell and Silver Lake Partners continue to press for control of Dell (DELL) in the largest leveraged buyout since the financial crisis, the deal's closure or possible failure could mark the limits of debt-financed mergers in today's low-but-rising interest-rate environment.

Put simply, Omnicom and Publicis' proposed merger may be a signal stock will soon be a better currency for acquisitions than debt, after a four-year market recovery puts most U.S. corporations at or above their pre-crisis record highs.

Peel back the gloss of the champagne-filled weekend merger announcement, made on a balcony overlooking Paris' Arc de Triumph, and suddenly the deal has a very unexciting financial rationale. In fact, it may be more germane to number crunching stock analysts than ad industry power brokers, who are reported to have first broached the idea in a series of handshakes at Davos six months ago.

Omnicom is trading in its slow but steady earnings growth and a large revenue base, particularly in the U.S., for exposure to Publicis' digital advertising capabilities and its faster earnings growth. Publicis, for its part, is getting increased exposure to U.S. markets, added revenue from a strong set of Omnicom brands, and a successor CEO.

According to consensus Wall Street estimates, Publicis will provide the lions share of the combined company's near 5% revenue growth and near double digit net income margin. However, Omnicom will contribute the majority of projected revenue, EBITDA and net income for the combined company.

For each share, Omnicom investors will receive 0.813 new shares in the newly formed Publicis Omnicom Group, a $2.00 special dividend and up to two more quarters of regular dividends. Publicis holders will receive one share and a EUR 1 special dividend.

When combined, both companies appear on better track to grow their earnings and share prices, especially as they adapt to changing habits among their corporate clients and threats posed by IT industry heavyweights IBM (IBM), Oracle (ORCL) and Adobe (ADBE).

Omnicom and Publicis shares surged in early Monday trading, however those gains faded through the day. Still, shareholder reaction indicates a fair stock-based deal, especially if investors become more confident it won't hit regulatory roadblocks.

Even skeptics of the $35 billion merger appear to concede Omnicom, the larger of the merged companies, had limited ability to grow its earnings.

Peter Stabler, a Wells Fargo analyst, characterized the benefits of the merger to Omnicom as "unclear," but said that the New York-based company's growth forecasts of 3.25% to 3.75% wouldn't be enough to move its share price materially higher. " We have difficulty identifying near-term catalysts," Stabler wrote of Omnicom's outlook as an independent firm.

Any chief executive facing such an outlook would have to consider mergers, acquisitions or a heavy dose of expansion.

Sunday's deal will help solve some of Omnicom's biggest challenges, particularly in faster-growing digital ad markets.

"Omnicom shareholders will now own a diverse collection of digital pure-play agencies... Omnicom has been hurt by their insistence of attempting to build digital capabilities within the confines of their agency networks, where we see significant difficulty associated with the hiring of talent to play a perceived second class role to traditional media practitioners," Stabler wrote, in a Monday client note.

Publicis shareholders will now have exposure to Omnicom's higher caliber creative brands, in addition to the company's stronger event marketing, branding, CRM, public relations businesses, Stabler noted. Publicis' 71-year old CEO Maurice Levy also has found a strong partner and a credible successor.

If the deal passes antitrust muster, the combined company will be the largest ad agency in the world, containing firms such as BBDO, TBWA, DDB and Saatchi and Saatchi, in addition to more digital-oriented players such as Digitas, LBi International and Razorfish. The company will trade under ticker "OMC" on the NYSE and Euronext Paris, and be headquartered in the Netherlands, lowering its tax burden.

Omnicom CEO John Wren and Publicis CEO Maurice Levy intend to share the CEO job for 30 months from the announcement. Afterwards, Wren will become the sole CEO position and Levy will transition to non-executive Chairman.

In a merger, both companies have solved problems facing their respective outlook without spending money, levering up their balance sheet or frustrating shareholders. The simple benefits of a stock exchange may also outweigh a lot of the hype surrounding the deal.

Yes, advertising firms may face a threat in "big data" IT and software players like IBM, Oracle, SAP and Adope, as they push new businesses such as "marketing clouds." Still, the ad industry may not be poised for technological upheaval from tech behemoths, or new breed of social media competitors such as Google (GOOG), Facebook (FB) and Twitter, according to Stabler, the Wells Fargo analyst.

If skeptical analysts such as Stabler do eventually come around to Omnicom's merger with Publicis, it may have more to do with the financial terms of the merger than any dramatic new strategy.

Contrast that with Dell's debt-fueled leveraged buyout and a lack of present shareholder support to get the deal done. The currently stalled takeover may be as much a reflection of the limits of debt financed deals as they are a reflection of challenges facing Dell's core PC-business.

Had Dell's shareholders been offered the stock of a competitor, for instance shares of Hewlett Packard (HPQ) or Microsoft (MSFT), would they have more readily accepted a deal?

It is hard to see many other underperforming stock market players facing a cyclical downtrend to their core business pursuing debt-financed consolidation given already stressed balance sheets and a bleak earnings outlook. Consolidation through stock mergers, however, could be an elegant solution.

Whether Michael Dell and Silver Lake win their takeover offer could be a big test to the viability of large debt-financed deals. Corporate executives and their bankers could wind up seeing Omnicom and Publicis' all-stock merger as a more practical alternative.

Richard Jeanneret, Americas Vice Chair of Ernst & Young's Transaction Advisory Services practices still expects overall corporate M&A to skew in the favor of cash and debt financed transactions, given the still-cheap cost of debt financing and healthy balance sheets across Corporate America.

In large deals, however, Jeanneret says stock could become a compelling acquisition currency given banks' current inability to finance M&A activity beyond $20 billion in size.

"There aren't a lot of transformative deals out there," Jeanneret says of mega mergers the size of Omnicom and Publicis' proposed tie-up. "If you do see them you will see a propensity for more equity."

-- Written by Antoine Gara in New York

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