NEW YORK Each quarter seems to bring a new, sizable acquisition by an industry holding company scrambling to add to its digital portfolio. In the last year alone, Publicis has added Digitas in a $1.3 billion headline-grabbing deal, and has also spent over $200 million on digital shops in France and China. WPP, in addition to a flurry of investments in emerging media, has purchased 24/7 Real Media for $649 million, Schematic and, sources say, is finalizing a deal to snap up Canadian digital shop Blast Radius. Even Interpublic Group has entered the fray, albeit on a much smaller scale, buying search shop Reprise Media in April and forming mobile shop Ansible through a partnership.
And through it all, the largest, most profitable holding company, Omnicom Group, has remained on the sidelines of the recent mega deals, balking at the price tags and, apparently, suiting up for a different game.
This has left many industry observers to wonder about Omnicom's overall digital strategy and question whether the conservative stance is a sign of strength or a case of a strong incumbent missing out on opportunities because of its comfortable foundation. "Omnicom's stay-the-course strategy is either courageous and right or just plain nearsighted and foolish," said one investment banker who has been involved in various digital acquisitions.
Responding to that comment in an interview with Adweek last Friday, Omnicom CEO John Wren, said, "What that comment fails to acknowledge is that we have had a core group of companies from the mid '90s that are very similar to what our competitors are buying up today."
There's little question that Omnicom made early bets in digital that are paying off. It entered a series of deals in the 1990s, adding Web shops Organic, Agency.com and 50 percent of Critical Mass. It also built Atmosphere BBDO and Tribal DDB into Web specialists, while its media agencies built interactive buying arms that will purchase over $2 billion of digital media a year. Organic and Tribal are on pace to grow revenue over 40 percent this year, according to sources.
"What you're seeing today is some catch-up from the others," said Alexia Quadrani, an equities analyst with Bear Stearns. "Omnicom has a very solid base."
Moving forward, Wren cited several approaches to Omnicom's digital strategy: speciality acquisitions, organic integration of his traditional ad agencies and partnerships with technology and media companies.
For instance, Omnicom purchased small mobile agency Ipsh and search shop Resolution Media in 2005 and 50 percent of digital shop EVB in July 2006. Last week, it acquired a minority stake in Millions of Us, a developer of brand presences in virtual worlds like Second Life.
Still, some inside and outside the group believe Omnicom has missed several opportunities to lay the groundwork for a more technology-driven future.
"A lot of these deals that went down, it's not like they weren't in front of [Wren] or on his plate," said one source. Jonathan Nelson, the chairman and founder of Organic who is advising Wren on the company's digital strategy, acknowledges that Omnicom has been involved at varying points in the discussions of nearly all the recent deals that have been inked in the digital sector. At the end of the day, Omnicom has been unwilling to break the bank and pay multiples out of line with historical prices. "We're interested, but the prices are really, really high," Nelson said, noting asking prices for many companies as much as doubled in the aftermath of the Google-DoubleClick deal, leading up to the astronomical $6 billion Microsoft paid for aQuantive.
Rather than those blockbuster acquisitions, Wren said, "we are looking at niches and skill sets for acquisitions where we can do a lot of experimentation and learning for our clients." Added Nelson: "Where we see a deficiency in our skill set we're going to buy something around it. But it's a little more subtle than the fireworks of buying Digitas."
Omnicom has also focused on the organization of its existing digital agencies. It has loosely aligned digital shops with traditional networks, pairing Organic with BBDO, Agency.com with TBWA and Tribal with DDB. While that's yielded "mixed results" in the words of one Omnicom agency exec, it has allowed the fast-growing digital shops to maintain their independence while giving its traditional networks a specialist resource.
But, if as Wren says, "everything will be digital in its approach," then why have DDB and specialist Tribal DDB? "Because clients are still buying it that way," he said last week.
Peter Kim, an analyst with Forrester Research, said, "It's not going to be enough to have these independent digital agencies functioning outside their traditional, media and direct agencies," he said. "Ultimately, you have to build these digital skills within the traditional agency brands."
Wren is quick to point to Goodby, Silverstein + Partners. "Two years ago, Goodby was 100 percent traditional and today they are 40 percent nontraditional." He added: "Then you have BBDO which had a certain bent; now you have David Lubars and a team of people who think in a new way. So we're changing it at every single level."
Still, some Omnicom executives feel the company has not moved fast enough to organize its digital assets in a way that creates an interactive marketing services platform, in much the way that Publicis is treating Digitas as a global digital platform. "There is no major global digital marketing powerhouse today," the source said. "That's the business opportunity."
Omnicom's reticence to engage in large-scale M&A could have downsides in what the future ad holding company looks like, said sources. This is the thinking behind WPP Group's acquisition of 24/7 Real Media, which adds what WPP chief Martin Sorrell calls "the third leg" of technology to the ad holding company's strengths in media and creative.
But analysts also question whether WPP has a solid strategy behind its acquisitions beyond gobbling up capabilities it sorely lacked. And before buying Digitas, Publicis derived just 7-8 percent of its revenue from digital.
With a market cap of $17 billion, Omnicom would have been an unlikely buyer of DoubleClick when Google snatched it up for $3.2 billion in April. Yet Omnicom had opportunities to buy the ad server before private equity firm Hellman & Friedman bought it for $1.1 billion in April 2005. In hindsight, some Omnicom executives see that as a strategic error.
"Wouldn't that have allowed Omnicom to be a lot more competitive, not too mention have a technology that allowed it to make money while they slept?" said an Omnicom agency executive.
Nelson views that as "would've, could've, should've" thinking. Building a scalable customer-intelligence engine is a key objective for the company, but owning an ad server isn't the only route there, he said. Gaining those consumer insights was a driving factor in Omnicom's formation of OMG Digital, a separate organization from its media buying arms, OMD and PHD, charged with using its $2 billion of digital media buying clout.
"We're going to see a different set of data" than Google, said Nelson, who founded and sold an analytics company before Organic. "It's not like somebody takes the chips and goes home. It's that we collaborate. It behooves the agents and the media companies to get the advertising to perform. Sharing data will be a big deal."
Says Wren: "The traditional advertising business in the '80s and '90s was about consolidation and acquisition; the future is about finding the right partner and the right way to work with those partners."