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Monday, October 28, 2013

The New World of Ad Agency Mergers?


On July 28th, the advertising and media world was surprised with the announcement that two giant holding companies--Omnicom and Publicis were merging. The new entity would be the largest advertising company in the world. Some 250+ agencies were involved in the merger covering including creative, media, digital, design, production, branding and public relations (I am sure that I am missing something).

The pundits got busy and people started the “welcome to our conglomerate, you’re fired” talk. Many talked about the creative clashes that would be inevitable and how when people talked “synergies” they were really saying that fewer people would be doing more work than ever to keep profits high. There is some truth in all that but if you look at what the principals said both at the announcement and since then, the merger strikes me as having little to do with advertising as we know it.

We have entered a new era that some have dubbed “Big Data.”  There is a record amount of personal information on customers that is in the hands of many giants including Google, IBM, Adobe and Oracle among others. Down the line agencies will be in a tight spot as the firms holding the massive databases can approach large marketers directly and bypass even the most sophisticated agencies. The major agency holding companies are keenly aware of this and see how vulnerable they will be or already are.

An old friend told me that the behemoths now have automated exchanges set up for tracking and placing digital media that have the look, feel and excitement of the trading rooms at Goldman Sachs and J.P.Morgan. So, with this merger, the new Omnicom-Publicis can now approach the Googles of the world with enormous orders for their new historically large client base.

So, the giants are finding a way to survive and get bigger in a rapidly changing environment. Yet what of the medium sized and smaller shops that this blog tends focus its attention? Clearly, the small fry will never have a trading room. And, their young digital media team, no matter how eager and talented they are, can never compete with the breadth of services or the terrific digital pricing that the giants can provide their clients.

Yet, mergers and acquisitions will still go forward. The result will likely be quite similar to what we have seen the last 50 years in advertising. Many, if not most, will be failures. You have seen this movie before but people who build modest sized agencies up from nothing are proud of their achievements (and rightly so) but are not used to taking orders or compromising much. So attempts to combine two different cultures almost never work. When merged mid-sized shops talk of “synergies” they are talking cost cutting which invariably means layoffs. A skilled broadcast negotiator handling $40 million in spot billing can easily handle $60 million especially if much of the new billing is in the same markets that he or she was previously buying. Staff, then, can easily be cut. The same is true is accounting, not to mention the creative teams.

To a certain degree, mergers today are often just buying time. A fellow wrote to me recently about how his money losing shop will probably merge with a slightly larger shop that is also losing money. The theory is that they can cut enough staff from both teams to make a profitable go of it as a larger company. The odds are not good but even if they do turn a profit after a huge cutting of staff, the chances are that the profit will be short lived. They need an infusion of new business or some organic growth from current clients. Without some injection of new revenue, the one time saving from the merger will dissipate quickly.

And now the big question. As digital grows, will Google et al call on the mid-sized shops clients directly? How can the little guys compete? They will not be giving Google and fellow Big Data travelers billions in revenue. Surely, there will always be boutiques who can do a splendid job of knocking out good quality work in legacy media especially in markets below the top 25. The mid-sized players, with or without mergers, will be between a rock and a hard place as digital growth accelerates.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

7 comments:

  1. Today marketing is growing rapidly, so a mid or small sized advertising agency should be always stay updated on current marketing trends.

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    Replies
    1. You might enjoy a post entitled "Sizzling Singapore" from September 30, 2011.

      Regards,
      Don

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  4. I don’t understand the merger, because both companies are both so big, they already have been at scale for most of the things discussed in the column and in the comments. Om, weren’t those two companies big enough on their own to support data analytics functions already? What is the required scale anyway? And in addition, there are absolutely no barriers to entry in the ad agency business. So this merger doesn’t stop entry of new companies or expansions of scope of the tech companies named.

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    1. I think what it comes down to is raising profits by cutting costs which, in advertising, generally means people. If you have a digital exchange set up, you can handle two billion without a huge increase in manpower than you had with one billion. In network TV, your team can double billing without a corresponding increase in staff. Look at Wal*Mart in recent decades. Their mantra is to continually reduce costs in every area. Agencies are seeing that it is a clear way to increase profits.
      Thanks for your comments.

      Don

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