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AOL to Gain as Publicis-Omnicom Proves Bigger Isn't Better

NEW YORK (TheStreet)-- Bigger just may not be better afterall.

Omnicom Group Inc.'s (OMC - Get Report) gain Friday following its mutual decision to scrap plans for a $35 billion merger with Paris-based rival Publicis Groupe reflects the view that the New York-based advertising giant is better off navigating the Brave New World of digital platforms alone rather than adding more layers of executives and fiefdoms. Omnicom and Publicis lost key accounts as the companies' attention was diverted to the demands of a difficult merger.

At a time when more advertising buys are being placed by computers using sophisticated platforms, the distinction of becoming the world's biggest advertising company didn't auger for certain success.

"In this new and very, very different environment for advertising, scale is not a critical factor anymore," Peter Kreisky, who has been advising media companies on strategy for more than 25 years, said in a phone interview. "Nimbleness and focus are winning share from the giants, and this is ultimately what stopped this merger from going forward."

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Omnicom shares were rising 0.9% to $66.80, trimming its 2014 loss to 11%. The American Depositary Receipts of Publicis were adding 0.4% to $20.93.

Omnicom and Publicis had assumed that amassing a single company with $23 billion in revenue would give them sway over digital ad placement, but the challenges of integrating two sprawling corporations headquartered in two different countries, each containing a myriad of individual and proud agencies with their own storied histories, proved insurmountable. 

The advertising industry has changed markedly in just the past two years as content companies such as AOL (AOL) invested heavily in advertising platforms in an effort to become larger players in the transition to digital and also to figure out how best to market their own content. 

Shares in AOL were rebounding 3.5% to $37.67 after the company's stock tumbled 21% on Wednesday after net income trailed analysts' expectations. The profit shortfall was largely tied to the expense of investing in the new advertising platforms and people that AOL has acquired and hired over the past 18 months. AOL's so-called traffic acquisition costs -- payments to third parties to share advertising revenue -- rose 54% in the first quarter to $150.5 million. Earnings per share were 34 cents, short of an average analyst forecast for 45 cents share.

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To coordinate its new emphasis on advertising technology, AOL in July hired Bob Lord, the former CEO of digital marketing trailblazer Razorfish, a division of Publicis to make AOL the go-to place for matching advertisers and video publishers that use computers to power what the industry calls programmatic buying.

Lord's task has been to sell marketers on programming at Huffington PostTechCrunch and the company's still popular Web portal while showing them how AOL's platforms, Ad-Tech and Adap.TV, the online video technology service it acquired in August for $405 million can change how companies buy advertising. On Tuesday, AOL said it would spend $101 million to acquire Convertro Inc., which helps marketers evaluate ad purchases, for $101 million.

"For the scale to be meaningful for AOL, it has to be pretty substantial, which explains why they're trying to get much bigger," Kreisky said. "For AOL to ensure quality at scale remains extraordinarily challenging as it will continue to be for Publicis and Omnicom. But either way, there's a new reality that smaller, highly-focused new competitors really and truly understand the nature of new requirement of these new forms of advertising."

--Leon Lazaroff is TheStreet's deputy managing editor.


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Leon Lazaroff is TheStreet's deputy managing editor.

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