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The Deal: Mad Men's Quest For Clout

Stocks in this article: OMC WPPGY IPG

NEW YORK ( The Deal) -- The Sunday unveiling of Publicis Omnicom Group as the world's largest advertising holding company gave Madison Avenue its largest jolt since the Saatchi brothers emerged atop the industry heap by acquiring Ted Bates Worldwide more than a quarter of a century ago. But if past is prologue, the agreement to unite Paris-based Publicis Groupe and New York-based Omnicom Group (OMC) as POG won't be nearly profound as the merger's ripple effects.

Consider that POG, should it be ratified by shareholders and approved by regulators, will turn the once highly fractured U.S. ad industry into a virtual duopoly. POG's $11 billion in domestic ad revenue would single-handedly represent more than a third of the country's $30 billion total and more than twice the amount of its nearest competitor.

That competitor is WPP (WPPGY), the advertising holding company with what seemed a lock on being the world's largest until POG's unexpected arrival. Publicis and Omnicom together, with a pro forma domestic market share greater than 50%, will no doubt raise regulatory scrutiny. But given advertising's penchant for copying as well as creating, the two will also raise the question: Is there enough room here for a triopoly?

For such competitors as Tokyo-based Dentsu, Paris-based Havas Advertising and New York-based Interpublic Group of Companies (IPG) -- all estimable players before POG potentially elbows them aside -- the answer they're seeking as they frantically call one another about creating a catchup combination is yes. Only they'll have to hurry, or at least two of them will, before WPP rethinks its loss of favored-nation status and attempts to acquire one of them.

This quest for scale will mostly be driven by these advertising holding companies' media operations. As Pivotal Research Groupm analyst Brian Wieser noted in a recent update, it wasn't until 2003 that clout became a part of media negotiations. That was when WPP gave a single unit, GroupM, control over volume deals historically managed by individual media departments within WPP's individual agencies.

GroupM soon learned it could cut volume deals even before having a precise reading of its collective clients' media budgets and then parcel out the acquired inventory on an as-needed basis. "This top-down approach to buying allowed GroupM to optimize its negotiating strategies and, arguably, pay less for like-for-like inventory than its competitors," Wieser reported.

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