The collapse of the proposed Omnicom-Publicis merger, a bravado effort to override cultural differences, executive egos and national tax law, does not come as a surprise. The venture had been displaying signs of distress for some time, with both sides admitting to difficulties.
The challenge of getting various tax authorities to agree to a complex and artificial structure – a Franco-US company incorporated in the Netherlands but tax resident in the UK – was one barrier. John Wren, Omnicom’s chief executive, warned investors last month of delays due to tax issues.
This did not convince everyone. As a rather gleeful Sir Martin Sorrell, chief executive of WPP, the companies’ biggest rival, observed from Beijing today: “The tax question is flannel. This is about social issues – they fell out with each other. It was more Mad Men and Don Draper than strategy and structure.”
But Omnicom and Publicis did not make things simple for themselves in various ways. Not only did the proposed deal involve a lot of individuals having to sublimate their egos, but it was structured in a very tricky way. There are three clear lessons from the way it has foundered.
First, although big cross-border deals are common – Pfizer’s attempt to acquire AstraZeneca and General Electric’s proposed purchase of the energy businesses of Alstom are two current examples – they still face cultural barriers. French companies are not the only ones that need to overcome amour-propre.
A Le Monde journalist suggested last month that the proposed merger would be “a [French] takeover in all but name” and Maurice Lévy, chief executive of Publicis, emphasised proudly in an interview with the paper after the collapse that he had not been prepared to cede to some of Omnicom’s demands.
Second, personnel decisions in mergers of equals are very sensitive. This deal involved an elaborate power-sharing arrangement, referred to in the original presentation as “balanced corporate governance consistent with the spirit of a merger of equals”. Mr Lévy and Mr Wren would have been joint CEOs for 30 months.
Having agreed the top jobs, they then spent several months tussling over the next job down – that of chief financial officer – without reaching an agreement. It did not suggest much hope for compromise on the other executive roles.
Third, strange tax structures are going to be scrutinised more carefully now than in the past. The separate efforts by the OECD, the G20 and the European Union to limit “base erosion” by large multinationals arbitraging among different tax codes seems to have thrown grit in the wheels of the venture.
Although Omnicom and Publicis both have businesses in the Netherlands and the UK, the proposed tax structure looked arbitrary – and more based on where corporate tax could be limited than other reasons. That may be a warning shot for other tax-advantaged merger structures.
There were no doubt other difficulties with the union too, but these were clearly enough to doom it.