The merger of Publicis and Omnicom to form the world's largest ad conglomerate is bound to raise more than a few eyebrows in Washington where regulators could add conditions to or even block the proposed $35 billion deal.
Though the holding companies' respective CEOs have said they don't expect regulatory hurdles, the numbers suggest otherwise—the combined companies would control 40 percent of U.S. media spending and 20 percent of the global market. "If it creates too much buying power, it can be anti-competitive," said Bert Foer, president of the American Antitrust Institute.
Large, advertising-dependent media companies have the most to lose in the deal, facing a behemoth of a media-buying concern with enormous clout when it comes to setting advertising rates. They could even be motivated to try to block the deal. "Media owners and national TV programmers in particular would face an industry where the combined entity plus WPP would account for more than two-thirds of their revenues," Brian Wieser, an analyst with Pivotal Research Group, pointed out in a report.
Not all observers think the newly formed entity's buying power will be an issue with regulators, however. Matt Chesler, a research analyst for Deutsche Bank, called any potential objection "probably manageable." He wrote: "There are complexities, but the agency industry overall remains fragmented, so the companies will argue that clients still have a variety of alternatives and that competition will remain high."
Jon Leibowitz, the former Federal Trade Commission chairman who is now a partner with Davis Polk in Washington, said he doesn't expect intense scrutiny, but said it won't be an easy pass either. "It'll be somewhere in between," he said.
Leibowitz cautioned against assuming that a 40 percent market share would trigger heavy attention from regulators. "It's too early to tell," Leibowitz said. "This is a more fragmented market, where barriers to entry are lower. What antitrust agencies will focus on is whether this is going to raise prices. When you get to 40 percent market share, that is sometimes meaningful, sometimes less meaningful."
While media buying power is the most obvious concern regulators are likely to scrutinize, there are other, more subtle concentrations of power regulators may examine, such as other marketing services the combined company will provide.
"The company will have information from a large part of certain industries, which isn't good for consumers or the industry," said Foer. "In theory, the company could help coordinate the strategy of major players in an entire industry. They can recommend when a company enters a market, how it does promotions, even set pricing strategies."
Digital advertising and data mining could also come up in any regulatory review.
"We will look into the antitrust issues and encourage our EU consumer colleagues to do as well," said Jeff Chester, executive director of the Center for Digital Democracy. "There is a question over data and privacy."
Wieser also suggested that the combined entity could wield more control in advertising technologies that depend on the agency business. "Between Publicis Omnicom Groupe and WPP, the two entities will have a disproportionate degree of influence in picking winning technologies in ad tech, platforms such as DSPs, bid-management systems, book-bill pay systems, etc.," he wrote. "[There will now be] two big customers accounting for the bulk of activity in some verticals, making a shakeout more likely."
The deal will be reviewed by either the Department of Justice or the Federal Trade Commission, a decision that will be made between the agencies once the companies file the transaction with the government. Merger reviews typically go to the agency that has the most expertise in the category. In this case, the FTC, which is in the process of reviewing the Nielsen acquisition of Arbitron, could be seen as having the most expertise in the ad business.
Regardless of which agency gets the review, it is bound to be a long process because of the seismic shift the deal is expected to have on the ad business. An early-2014 closing date might be positive thinking.