ODDS ON FOR OMNICOM

How do you turn defence into attack? Look no further than Omnicom. It is fast becoming the world’s largest marketing services group. Is this the result of a masterplan or merely naked opportunism combined with a superabundance of cash? By Jon

SBHD: How do you turn defence into attack? Look no further than Omnicom. It is fast becoming the world’s largest marketing services group. Is this the result of a masterplan or merely naked opportunism combined with a superabundance of cash? By Jon Rees and Tom O’Sullivan

If Saatchi & Saatchi were the Viv Nicholson of the Eighties advertising world then Omnicom would be her more sensible sister-in-law who always put an “x” for no publicity.

The infamous pools winner declared she would “spend, spend, spend”. She did, and so did Maurice and Charles as they built the biggest ad agency in the world – and one of the biggest debts. Omnicom is a byproduct of that expansionist period. Ironically, as it seems now, it was created as a defensive measure to fight off the marauding Saatchis in August 1986. A reluctant BBDO was being wooed by the brothers before it joined forces with Doyle Dane Bernbach and Needham Harper to create the defensive alliance.

Quickly and cannily it switched from defence to attack. It is now likely to depose WPP, Interpublic and Saatchi & Saatchi, whose three-agency structure is looking increasingly fragile, as the biggest player in worldwide advertising. Its most recent raid came last month with the purchase of Chiat Day Рthe culmination of a long string of acquisitions. But overall Omnicom has spent $800m (̼526m) in the past six years, picking up hundreds of companies and it still has money in the bank. Its annual results are expected to reveal a 15 per cent increase in revenue to $1.8bn (̼1.2m) for 1994 with profits reaching $100m (̼66m).

As a result, the Omnicom name is never far from acquisition speculation. Two years ago Omnicom was rumoured to be on the verge of spending ú30m on Bartle Bogle Hegarty. It has also recently been linked with the Bozell network and, of course, it bought Chiat Day to strengthen its youngest and arguably weakest ad network TBWA International. But on the whole, Omnicom has managed to grow stealthily, shunning the publicity coveted by its contemporaries.

The group is split into four distinct divisions. There are three ad networks, BBDO Worldwide, DDB Needham Worldwide and TBWA International, plus the rather formal-sounding Diversified Agency Services, which acts as a corporate home for interests ranging from publishing to public relations, direct marketing, design and brand-naming.

“In the past few years we have been making acquisitions of about $100m, plus or minus $30m (ú19.8m),” says Omnicom chief financial officer Fred Meyer, as if it were loose change. “The key thing is adding about a third through acquisition to our revenue growth rate, which is about ten per cent a year.” He claims to be puzzled by questions regarding Omnicom’s global strategy, and denies there is a masterplan. “We don’t subscribe much to five or ten-year plans; we don’t spend a lot of time on philosophy,” adds Meyer.

An Omnicom insider puts it more succinctly: “We have been fortunate to be around when other networks are strapped for cash, so it has been a good opportunity to pick and choose.”

In essence Omnicom is an opportunist. Chiat Day, which has apparently been looking for new owners for two years, was an opportunity. A privately owned middle-sized agency, with an excellent creative reputation, carrying debts estimated at $40m (ú26.3m), it was, in the eyes of the Omnicom board, ripe for plucking. It also holds the Nissan car account in the US and Canada, which TBWA handles across most European markets. Estimates on the size of the deal vary between $50m (ú33m) and $75m (ú49m) allowing for the debt repayment.

Officially, it has been acquired to strengthen the TBWA brand in the US. But observers note that TBWA needs strength in New York while Chiat Day’s power base is in Los Angeles. It is difficult to avoid the conclusion that Omnicom saw the chance to pick up an agency with one good client and a potent name – at least in the US – on the cheap.

“Clearly TBWA is not as well represented in the US as in Europe and this deal was designed to change that,” says the insider. “It is the junior network but not necessarily the weakest – it was a strategic imperative to get a hold on the Nissan account.”

On the debit side, however, Chiat Day has a record of disturbing consistency when it comes to losing big clients – in recent years it has lost American Express, Reebok and MTV and now depends on Nissan for more than 60 per cent of its revenue. Any business so dependent on one client, let alone one in the volatile world of advertising, was obviously in a vulnerable position.

The questions about the deal are still reverberating around US ad circles. “Is buying Chiat Day a strategic move because their other two ad networks have gone ex-growth? Was it bought because it was cheap or strategic? There are no UK public companies in this sector that are buying except Abbott Mead Vickers.BBDO, 27 per cent owned by Omnicom. I think’s it’s a way of fuelling Omnicom’s earnings in the US,” says one agency source.

Another source says: “All the big agency networks have a problem with growth, and the conflicts it brings – a strengthened TBWA could be an outlet for that. But at the end of the day the question will be whether it actually helps that much or whether Omnicom will need to go shopping again to strengthen TBWA.”

There’s no evidence to suggest that client conflict is likely to be a factor in limiting growth – Chiat Day handles Coca-Cola’s latest launch, Fruitopia, while the BBDO network works for Pepsi. Neither client is reported to be overly concerned by this.

There is unanimous support for the deal from US analysts. Wasserstein Perella Securities was not alone in asserting that “the merger of these two firms creates a full-service agency with a significantly enhanced geographic mix”. There is no doubt that the Omnicom chequebook is still at large. Meyer told US analysts before Christmas that Omnicom is continuing its search.

But its options for fresh purchases are increasingly limited.

Meyer’s watchword has become “good housekeeping”. It was only with the purchase of BMP in the UK for $200m (ú132m) in 1989 that its gearing (the ratio of total debt to capital) topped 50 per cent. Since then it has fallen steadily and reached a four-year low in 1993 at 43 per cent. As long as it remains around that figure then Meyer is happy and so, it seems, are those who put up the money for the acquisitions.

“If we do it right and the market is convinced that we have performed well then people are willing to put more money at our disposal; we have a good investment grade rating. We have a credibility which allows us to raise more funds,” he says.

Since 1987 acquisitions have mainly been outside the US – filling gaps in the company’s international coverage while domestic acquisitions were mainly in the marketing services field under the increasingly important DAS arm. In the UK, over the past two years it has bought Interbrand and MacMillan Davies and then TBWA and Griffin Bacal – though it is generally understood that it bought Griffin Bacal at the behest of Hasbro in order to secure the rest of the Hasbro business within one network.

Diversification is central to the development of Omnicom – a point underlined by the fact that DAS chairman and ceo John Wren is being tipped as favourite to replace Bruce Crawford when he gives up the reins as group president – probably in the next year. At the moment only 20 per cent of the DAS business comes from referrals within the group, but that is being reviewed.

“We are attempting to create synergies within the companies,” says DAS chief executive and full board member Peter Jones.

“We are developing individual strategies for each of the 12 category groups. At the moment two-thirds of DAS business is in the US. We want to get closer to a 50/50 balance between the US and non-US interests.”

One of the few apparent clouds on the Omnicom horizon revolves around the retirement of Crawford, BBDO ceo Allen Rosenshine, and BBDO chief financial officer James Cannon, who can all look forward to million-dollar payouts extending over the next ten years. It is the type of deal which provoked the shareholder revolt at Saatchi & Saatchi.

The precise remuneration will be based on their final year’s salary and cynics suggest it gives the trio a strong incentive to ensure the deal to add Chiat Day to Omnicom’s third-string advertising agency TBWA makes money quickly; and less interest in the long-term value of the deal. A claim which is dismissed by Meyer.

Whatever the Chiat Day deal does for the retirement conditions of the three senior executives, it will not satiate Omnicom, which still expects for about a third of its yearly growth rate to come from acquisitions. DAS and TBWA International, the relative youngsters in the group, are the likely beneficiaries. Meyer says a glamorous, big-name deal is unlikely for the time being; certainly Omnicom appears to have managed perfectly well without it so far.

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