Culture clash puts end to merger hope

The sudden collapse of the planned $12bn (7.5bn) media merger between Leo Burnett and the MacManus Group underlines the conflicting interests of the UK and US media industries.

After almost a year of negotiations, and with an official announcement of the UK merger expected in less than a fortnight, last week’s unexpected derailment of the deal was embarrassing and frustrating for those involved in this country.

Roy Bostock, US chairman and chief executive of The MacManus Group, has a more relaxed attitude towards the months of negotiation: “We explored it, it didn’t work out, and now we are going back to our original plan.”

The proposed deal between The Leo Burnett Company in Chicago and MediaVest’s holding company, The MacManus Group in New York – both privately-owned – would have created a giant media services agency, ranking among the world’s three largest.

It would have brought under one roof media accounts with billings estimated at $12bn (7.5bn) and including among its clients multinationals such as Procter & Gamble, Diageo, Mars, Philip Morris, McDonald’s and Amoco.

The merger seemed a good fit because both companies are P&G roster agencies, and although both have a massive presence in the US, Burnett has a stronger position in Latin America and Asia Pacific.

But the deal’s real motivating force was Europe, where both agencies have relatively weak networks and where they must compete with media-only specialists such as Zenith, Tempus and Carat. In Europe, players such as WPP Group, IPG and Omnicom have either consolidated their media operations already or are investigating how best to achieve economies of scale between their multiple agency networks.

Single media networks such as Burnett and MacManus’s MediaVest face being left behind in Europe with the emergence of these huge operations, which will be able to pool greater resources into sophisticated research. Consolidation, it is argued, means agencies can give a better service to increasingly international clients which are centralising their media to cut costs.

But this sense of urgency among medium-sized players to get together in Europe is clearly not matched in the US.

Bostock says: “I am certainly not embarrassed, certainly not angry, certainly not disappointed… It was an opportunistic situation.”

In a joint statement, Bostock and Rick Fizdale, Burnett chairman and chief executive, blame fundamental differences over the complex issue of how to structure the merged agency in the US. They deny that personnel issues derailed the negotiations.

This is despite speculation that Irwin Gotlieb, president and chief executive of MacManus’s US media operation TeleVest, and Jack Klues, chairman of Burnett’s US media business StarCom, do not get on.

Bostock describes the structural differences as “different philosophical approaches”. TeleVest is the biggest buyer of national television in the US, responsible for the $1bn (63m) P&G TV account. By contrast, StarCom is an integrated agency, offering both media buying and planning.

What seems clear is that there was little desire to make the deal work in the US, unlike the UK situation, where MediaVest and Burnett joined forces to pitch for the P&G 170m media account. Burnett won the TV and outdoor buying and MediaVest won the 2m radio account, although a dedicated P&G unit would have been set up in a merged agency, under Burnett’s joint executive media director David Connolly.

For Burnett in the UK, the deal would have given the media division independence from existing full-service agency ties, while MediaVest would have been catapulted into second place in the billings table. With MediaVest UK chief executive Jim Marshall in charge, MediaVest’s joint managing directors Chris Locke and Robert Ray and Burnett’s joint executive media directors, Connolly and Richard Beavan would have become managing partners.

But Kevin Malloy, worldwide media director for DMB&B, says: “There is a different proportionate view in the UK.” About 55 per cent of the company’s media billings come from the US, where it is by far the number one, while StarCom is the number two player. In the US, there was just no need to find a solution.

This apathetic attitude towards successfully completing the deal is indicative of a more general reluctance about creating powerful, stand-alone media units in the US, which is still very much a full-service environment.

To provide some examples: Med-iaVest, MacManus’s supposedly global media brand, does not yet exist in the US; while Martin Sorrell, head of WPP, has so far been unable to fully spin off the in-house media functions of his full-service agencies J Walter Thompson and Ogilvy & Mather to create MindShare, which is already in place in the UK.

Splitting media from creative work is painful as the main agency stands to lose the media profits, which has an impact on the bonuses of the agency management. Agreement also has to be reached on what share of commission is awarded to advertising and what to media. The “creative agency” wants to lose as little as possible, which media practitioners argue leads to their industry being undervalued.

James Walker, chairman of MindShare’s consultancy arm the Advanced Techniques Group, who was frustrated in the attempt to set up a New York office and is about to leave to head a consultancy called the Edge, says: “The American market is backward. Media is seen as being one up from photocopying. There is a reluctance to let media companies be their own bosses.”

One UK media agency head comments: “The US is a huge volume market and very profitable. Why shake that up? If they are all right in their own backyard, the rest of the world can look after itself is the attitude.”

With hindsight, it might appear that the UK agencies became too zealous about the merger. Certainly P&G was always cautious, appointing Burnett to its TV account on an exclusive contract. But a management structure for the merged agency had been mapped out – it is understood that senior Burnett personnel turned down alternative job offers to back the new set-up. They had even proposed the name StarVest for the merged company. The MediaVest client KFC reviewed its business because of the impending conflict with McDonald’s, handled by Burnett.

It is hard to believe that the US management allowed matters to go on for so long before discovering that the two agencies couldn’t work together. Their explanation is that the discussions started purely as a defensive move in Europe. Only when they realised the merger had to be global to work effectively, and they looked more critically at the US, did it go off the rails.

Jeff Fergus, Burnett’s group president for Europe, the Middle East, Africa and Asia-Pacific, says: “Putting together a global media organisation is not easy. There is a lot of talk about it, but nobody has actually done it.”

Burnett denies it is looking for a new partner, although Fizdale admits: “We may look for tactical partnerships in certain key markets where our platform is not as competitive.” He says there is “a very good chance” that Burnett’s media brand StarCom will be brought to the UK.

In the UK, Burnett and Media-Vest have had to convince their clients that the merger makes sense, and in doing so have revealed shortcomings in their own operations. Now the merger has collapsed, and there is nothing – at least in the short term – to take its place.

Comments

    Leave a comment