WPP Expects More Consolidation Amid Publicis Groupe-Omnicom Deal

Rival fans flames on potential conflicts, regulatory hurdles

In releasing 2013 interim results, WPP Group formally addressed the implications of the recently unveiled Publicis Groupe-Omnicom merger, which it described as a “big, bold, surprising move.”

For its own part, the company said it would ramp up the pace and volume of its activities in areas like fast-growing markets, new media, data investment management and the application of technology.

“To underline the importance of these strategies and their client centricity, we are raising each of our fast-growth market and new-media sector targets from 35-40 percent of total revenues to 40-45 percent each, over the next five years,” WPP said in a statement. “A reinforcement of the same strategy, but more and faster, as we have already started to implement.”

The firm went on to offer an assessment of the merits of the combined No. 2 and No. 3 holding companies that would overtake WPP as the industry leader, should regulatory and corporate governance concerns be resolved—issues that WPP termed “significant.”

“Potential client and, even more importantly, people conflicts are considerable, exacerbated by a lack of pre-announcement consultation,” the company said. “If that was not enough, we have consistently said that with the exception of media buying there are dis-economies of scale in creative industries that have to be managed carefully.”

In the aftermath of what would be the ad industry’s largest deal, WPP concluded that the new operating environment would give it and other competitors “enhanced opportunities and is at worst neutral and at best highly positive.” The company hinted at what most observers widely expect—particularly from the highly acquisitive WPP—saying the transaction will lead to “further consolidation and concentration” among industry players.

Pivotal Research Group analyst Brian Wieser pointed that out as a key takeaway and said WPP CEO Martin Sorrell has already implied in a Bloomberg interview that the company will respond through acquisition. 

“Media is the primary area where WPP is potentially disadvantaged, presuming [Publicis Omnicom Group] reorganizes itself to capitalize on the scale it will possess following the merger,” Wieser wrote in a research note. “Horizon Media is the largest independent media agency, but billings in the U.S. are only $4 billion, and Havas' media agencies amount to only $3 billion in the U.S. By contrast, IPG's primary media agencies amount to more than $14 billion in the U.S. alone.”

IPG has long been seen as a prime takeover target in the ad industry.

Wieser went on to say that while dis-economies of scale exist in creative agencies, this has not deterred WPP from buying them in the past.

“Getting deeper in media agencies may require purchasing the creative agencies that come with them,” he wrote. “Further, Sorrell noted dis-economies of scale prior to (WPP's) acquisition of Grey in 2004, which is to say we don't think that this should be read as a reason why they would not make an acquisition."

In releasing results for the first half, WPP said revenue climbed 7 percent to $8.21 billion and pre-tax profits rose 12 percent to $812 million. The company slightly raised its 2013 organic growth forecast to more than 3 percent.