PARIS — Omnicom Group Inc. and Publicis Groupe SA say they are combining in a "merger of equals" that will create the world's largest advertising firm, one worth more than $35 billion.
The combined company will be called Publicis Omnicom Group and be jointly led by Omnicom CEO John Wren and Publicis CEO Maurice Levy as co-chief executives. The move is designed to bolster the companies' focus on growing Asian and Latin American markets such as China and Brazil, where they each have ramped up operations to counter lackluster growth in weak European markets.
But although a combined firm will allow for more pricing power in general, the decrease in competition could present regulatory hurdles in the U.S. and Europe. Client conflicts also could be an issue, as rivals such as Coca-Cola Co., PepsiCo, McDonald's, Yum Brands' Taco Bell, Johnson & Johnson and Procter & Gamble now find themselves under the same umbrella.
Rich Tullo, an analyst at Albert Fried & Co. in New York, predicted pushback from regulators in both the U.S. and France. The U.S. could be wary of one company controlling such a large portion of the market, he said, while in France, authorities might not take warmly to any Americanization of a company that is a bright spot in the bruised French economy.
Tullo also questioned whether the combined company could live up to promises like the $500 million in cost savings touted with the announcement, given Europe's shaky financial condition. "That sounds like financial alchemy, if you ask me," he said.
Omnicom Group Inc., based in New York, owns BBDO Worldwide, DDB Worldwide Communications Group and TBWA Worldwide, among other agencies. Paris-based Publicis Groupe SA runs its namesake agency as well as Leo Burnett Worldwide, Saatchi & Saatchi and DigitasLBi. Their merger creates a company with combined annual revenue of about $23 billion, leapfrogging them over current London-based industry leader WPP PLC.
For the first year, Omnicom Chairman Bruce Crawford will serve as non-executive chairman of the new company. He will be succeeded by Elisabeth Badinter, the current Publicis Groupe chairwoman, and daughter of its founder, for the second year.
Levy is slated to take the non-executive chairman's seat after 30 months, leaving Wren to continue as sole CEO from that point.
Omnicom, which also owns public relations firms such as Fleishman-Hillard, Porter Novelli and Ketchum, reported 2012 profit of nearly $1 billion on revenue of $14.22 billion. Earlier this month, the Madison Avenue giant posted second-quarter earnings that topped analysts' average forecast, though revenue growth of 2 percent fell just short of expectations.
Founded in 1986, Omnicom generates just over half of its revenue from U.S. clients, and about one-quarter from European and British markets combined. The company's stock has risen 31 percent in the last 12 months, recently peaking at $67.43 on the New York Stock Exchange.
Omnicom will benefit from Publicis' strategic shift in the last few years toward digital operations, as the French company beefed up its digital marketing profile with the acquisitions of Digitas, Razorfish, Rosetta, Big Fuel and LBi. Publicis, which had revenue of $8.78 billion in 2012, had targeted generating 75 percent of its revenue in digital and fast-growing countries by 2018, according to a recent investor presentation.
The move gives Publicis, which has faced questions about who will succeed 71-year-old Levy, access to Omnicom's well-regarded senior leadership, said James Dix, an analyst at Wedbush Securities.
Analysts said the deal also represents even more consolidation in an industry that is already dominated by just a few players, a fact that might not sit well with U.S. regulators.
If the Omnicom-Publicis combination goes through, the combined company would account for nearly 40 percent of the U.S. ad industry, twice as much as the nearest competitor, WPP, according to Brian Wieser, an analyst at Pivotal Research Group in New York.
Wieser said Sunday the deal came as a surprise to many in the industry. Omnicom, he said, has "always been viewed as too large to get any larger."
The combined company will have more than 130,000 employees.
One concern is whether Omnicom and Publicis can strike a harmonious balance of power — something that can be difficult in mergers of similar-sized companies.
"It's not clear yet who really is in the driver's seat," Wieser said. "That will emerge over time."
The fact that the two firms are based in different countries could also become an issue, Dix said. "You have these fiefdoms that keep people from playing together. One company is based in Paris, one is in New York. Where is the power center?" he said in an interview Saturday.
Dix expects that top executives are comfortable with the structure of the deal, but the adjustment may be more difficult for the next level of executives who run the firms' units.
"Now they have to fit together into a broader organization," Dix said. "If you lose clients or have defections of senior executives then you have something that looked good on paper but didn't quite play out."
The combination has been approved by the boards of both companies, but remains subject to regulatory approval in both the U.S. and Europe, and to a vote by shareholders of both companies. The deal is structured so that the shareholders of Publicis Groupe and Omnicom, after special dividends, will each hold approximately 50 percent of the company.
Publicis Groupe shareholders will receive one new share of Publicis Omnicom Group for each Publicis Groupe share they own, together with a special dividend of 1 euro per share. Omnicom shareholders will receive 0.813 new shares of Publicis Omnicom Group for each Omnicom share they own, plus a special dividend of $2 per share. The new company intends to be listed in Paris and on the New York Stock Exchange.
The combination could have a domino effect on the industry, spurring marriages between other ad giants who might fear they can't compete otherwise, said Michael Corty, an analyst at Chicago-based Morningstar. "Within the ad agency industry, this is potentially an earthquake deal."