PARIS (The Deal) -- Advertising heavyweights Omnicom Group
(OMC - Get Report) and Publicis Groupe SA have abandoned their $36.1 billion merger, blaming obstacles that had slowed the progress of the deal and damaged both groups' operations.
"The challenges that still remained to be overcome, in addition to the slow pace of progress, created a level of uncertainty detrimental to the interests of both groups and their employees, clients and shareholders," Omnicom CEO John Wren and Publicis Chairman and CEO Maurice Levy said in a joint statement. "We have thus jointly decided to proceed along our independent paths."
The decision comes after Wren warned last month that regulatory delays threatened to prolong the merger process beyond acceptable limits. It also reflects a mounting clash of cultures that had derailed integration and delayed key management appointments.
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"We suspect the deal fell apart over management issues (and in particular the appointment of the CFO) rather than tax issues," noted Sanford C. Bernstein & Co.'s London based analyst Claudio Aspesi. "This is a setback for Publicis...the rationale of building up financial scale in the face of technology was sound."
On a conference call, Wren seemed to concur with that view: "We knew there would be differences ... but I know now that we underestimated the [corporate] cultural differences," he said. "We believed we would finish this in six months and here we are nine months later with a lot of issues and there is no finish line in site and that is not healthy for anyone."
The all-stock merger, which was announced in July, would have been the biggest ever deal in the advertising industry, providing the group with scale in digital media to compete with new digital advertising rivals including Google Inc. and Facebook Inc. New York-based Omnicom is the world's No. 2 advertising agency by revenue, ahead of Publicis, of Paris, at No.3, and the combined group would have had sales of about $23 billion, moving it ahead of industry leader WPP Group plc.
The merger talks were always likely to be tricky, requiring consensus on key appointments from the 50/50 partners, the approval of 42 national regulators and the support of rival clients including PepsiCo Inc. and Coca-Cola Co., and Microsoft Corp. and Google.
Omnicom and Publicis further complicated the fusion by attempting to structure the deal so that neither company, nor their shareholders, would have to pay tax relating to the merger. That plan was still awaiting approval from France, which is the home of Publicis, the Netherlands, where the combined group was to be registered, and the U.K, its planned tax domicile.
Chinese antitrust approval had also emerged as a drag on the deal's progress after Chinese government told the companies that a Phase 3 review of the deal would end on June 16.
Omnicom and Publicis initially hoped to finalize the merger by the start of 2014. That deadline was soon revealed to be hopelessly optimistic as regulatory delays mounted and the merger implementation talks led to disagreements over the best way to run the new company.
Publicis remained wedded to its largely centralized business model, which stands in direct opposition to Omnicom's preference to let business units operate with a high degree of independence. Significantly, the companies failed to name a CFO for the combined group, leaving them without oversight of the financial aspects that would guide the new entity's structure.
"This was not the sort of deal you could push through by committee and consensus," said a London-based analyst who asked not to be named. "The cultures were too different, the egos were too big. You needed someone at the top with a single vision and the willingness to ruffle feathers."
Wren and Levy had planned to jointly guide the company through the merger process and share the CEO role for an initial 30-month period following finalization of the deal.
The extent of the differences was made plain in a Publicis presentation to analysts on Friday, in which the French company said that the merger threatened Publicis' growth momentum by diluting its business model.
Publicis also said that the financial markets had remained skeptical of the benefits of the merger, noting in slides that the forecast benefits of a deal had not been integrated into its share price.
As for Onmicom, it is unlikely to pursue any future deals the size of its planned merger with Publicis, Wren told the call. The New York agency does, however, have a number of smaller acquisitions that it had passed on during the talks with Publicis that it is likely to revisit. "We have a bit of catching up to do there," said Wren.
The companies said that they had freed each other from all obligations relating to the merger and that a $500 million breakup fee, due if either company walked away, would not have to be paid. The partners have even so paid richly for their failed dalliance. Omnicom has spent just under $50 million on the merger implementation, primarily on advisers' fees, according to SEC filings.