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 John Wren, the head of New York-based Omnicom, and Maurice Levy, his
opposite number at Paris-based Publicis, are in regular contact to
try to settle the CFO choice, which has fuelled tensions between the
two sides since September as they seek to secure regulatory
approvals for the blockbuster deal, the people said.
Both remain committed to the tie-up, which would create the world's
biggest ad agency ahead of current leader WPP <WPP.L>, added the
sources.
The infighting over the CFO shows the pitfalls of trying to engineer
a "merger of equals" as the deal was billed when it was announced to
much fanfare in July.
Some analysts, investors and rivals have expressed doubts over
whether executives and staff in the two companies, especially their
veteran CEOs, will be able to effectively work together if the deal
is completed. Other mergers with similar profiles, including a 2006
Franco-American tie-up between telecom equipment makers Alcatel <ALUA.PA>
and Lucent Technologies, have foundered over culture clashes.
The CEO of rival WPP, Martin Sorrell, said on Friday that most
people he was speaking to said there was now a third to a half
chance that the deal would not be completed.
The tensions between the top executives of the two companies were
first reported by the Wall Street Journal on Friday.
The merger calls for a 50-50 ownership split of the equity in the
new company, Publicis Omnicom Group, with Wren and Levy serving as
co-CEOs for 30 months from the closing.
The two companies initially aimed to close the deal in the first
quarter of this year, but an ongoing China antitrust review and tax
jurisdiction issues that were disclosed by Omnicom last Tuesday have
delayed completion. Publicis said last week that the deal would
close in the third quarter, but Omnicom's Wren now declines to
predict timing.
Omnicom wants its CFO, Randall Weisenburger, to get the top finance
job, while Publicis wants its CFO, Jean-Michel Etienne, the people
said.
PROFIT MARGIN QUESTION
Behind the spat over the group's finance chief is a deeper question
about how the new operation should be run, said two of the people.
To boost profits, Publicis has long centralized many purchasing and
support functions for the roughly dozen advertising agencies it
owns, such as Saatchi & Saatchi, Leo Burnett and Razorfish. Analysts
say the approach has helped Publicis achieve higher operating profit
margins than its rivals; its margin stood at 15.9 percent last year,
compared with 12.5 percent for Omnicom and 15.1 percent for WPP.
The choice of the CFO could determine whether the new company adopts
the Publicis approach or the more decentralized model favored by
Omnicom in which individual agencies have more leeway in everything
from technology systems to supplies, the people said.
"There are ongoing talks on the leadership issue," said one of the
people on Sunday. "Wren and Levy are determined to find a solution
because it is simply in the interests of both companies. The best
guarantee of success is the two CEOs determination to complete the
deal."
The companies also continue to work on resolving tax issues that
have slowed down the deal. Wren spooked investors on Tuesday when he
disclosed that the companies had not yet been able to get approval
for their plan to have a tax residency in Britain, while being
legally headquartered in the Netherlands.
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Although the British tax authorities sent a positive signal in
meetings with the companies over the new entity being tax resident
in Britain, the Dutch authorities were not supportive, two of the
people said. The Dutch rejected the idea that the new company could
be legally based in that country but not be subject to local tax
rules.
"The Dutch authorities expressed a desire not to lose their tax
sovereignty over the new company to the English," said one of the
people.
One option to solve the problem might be to seek double residency
for tax purposes in both Britain and the Netherlands, which is rare
but may be workable, the person added.
Publicis and Omnicom continue to work on the issue. The Dutch and
the British would have to agree for Omnicom and Publicis' original
British tax residency plan to become a reality.
Another approval needed from France's tax authority is on track and
not expected to pose a problem, the sources said.
OTHER SIGNS OF TENSION
Besides the tussle to name the finance chief, there are other signs
that relations between the two companies are fraying.
They have not been able to agree on which company will be listed as
the "accounting acquirer", or the buyer from an accounting
standpoint, on official filings to the U.S. Securities and Exchange
Commission. While the issue is a technicality, it has gotten tangled
up in the CFO fight, one of the people said.
Usually in an acquisition, the accounting acquirer is the party
receiving the bigger share of the equity and voting rights in the
new company. In the Omnicom-Publicis deal both sides are due to
receive an equal stake and voting rights in the new company, so a
series of criteria must be analyzed to determine which side is the
accounting acquirer.
Robert Willens, a corporate tax and accounting analyst based in New
York, said the dispute over accounting acquirer pointed to a
disagreement over management control.
"That could be symptomatic of other, more deep-seated conflicts
between the companies," he said.
WPP's Sorrell said he would prefer the deal go ahead because in his
view mergers of equals don't work. "I think the best result for us,
frankly, would be for the deal to go ahead with joint CEOs, fighting
with one another about who's running the company," he said in a
Reuters Insider interview.
(Reuters Insider:
r.reuters.com/qax78v)
Sorrell said the results conference calls from Publicis and Omnicom
last week "sounded like two ships passing in the night."
(Additional reporting by Anjuli Davies and Jennifer Saba;
editing by
Martin Howell)
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