There Is No MOE (Merger of Equals)

Mark Herndon headshot
By Mark Herndon
Chairman, M&A Leadership Council
Jun 29, 2016

The media has been ablaze recently with the dramatic news about the termination of the $35 billion “merger of equals” between global advertising, media and communications leaders Publicis Groupe SA and Omnicom Group, Inc. In glaring front page and “above-the-fold” headlines, The Wall Street Journal proclaimed on April 26, “Clashes Over Power Threaten $35 Billion Ad Agency Merger,” and finally on May 9, “Merger of Ad Giants Scuttled.”

It’s not all that often that M&A news makes the front page of general interest papers and business or trade publications alike, but then it’s not every day that one of the largest-ever-on-record announced deals is later just called off – especially not for primarily cultural and governance control issues, as is now becoming clear in the behind-the-scenes reporting.

When announced on July 28, 2013, this deal was immediately heralded as a merger of equals and a deal to combine best-in-class communications, advertising, marketing and digital services to compete more effectively with the likes of Google and Facebook in increasingly dynamic and capital intensive digital, social and big data sectors. According to the initial announcement press release, the combined company would bring together some of the most iconic entities and talent in the industry, “with compelling benefits for clients, employees and shareholders.”

On a pro-forma basis, shareholders of both companies would receive approximately 50 percent of the new company’s equity. The combined firm was estimated to have a market cap of approximately $35 billion, total combined revenues of approximately $23 billion, and be able to achieve approximately $500 million in synergies. (If only they could agree on how to agree!)

"It's not every day that one of the largest-ever-on-record announced deals is later just called off."

As alumni of the M&A Leadership Council's executive training workshops can attest, we routinely discuss the point that, in reality, there is no such thing as a merger of equals (“MOE”). A few of the most common MOE risks and issues are illustrated in this downloadable resource, MOE Characteristics & Common Priority Issues.

We’ll leave the punditry on the Publicis Omnicom Group (POG) deal to others. For now, let’s identify some of the major “lessons learned” we can glean from the widely available media reports on this deal. Far from being critical in this analysis, we are approaching this with the greatest degree of respect and empathy. We know and respect many extremely talented people in these outstanding organizations. Anyone who has done M&A deals or integrated them has a few of these “tire tracks” on their back and the war stories to go with them. If anything, I salute Publicis Chairman, Maurice Lévy, and Omnicom CEO, John Wren, for their courage and customer focus in stepping up to make an extremely difficult decision to terminate the deal.

Here are a few things that should immediately stand out as “MOE lessons learned” from the POG deal. We’ll highlight others in the future, so please provide your questions and comments that you would like us to respond to.

Deal Complexity. I love what John Wren told analysts and reporters last Friday: “If I had to summarize in a tweet, it would be 'corporate culture, complexity and time.' And I would still have 100 characters left.” To be sure, this was an extremely complex deal. They were bringing together two globally dominant players that had each grown extensively through acquisition. There were almost certainly national cultural issues at play (see Understanding National Cultures in M&A), but more importantly, they were trying to incorporate the NewCo in the Netherlands, while splitting headquarters between France and the U.S.

In the end, legal and tax issues in the European Union were vastly more complex than initially understood. According to company officials commenting in media reports, these were nothing that could not have ultimately been resolved, but with no closing scenario in sight nearly ten months after announcement, there was already too much time, money, opportunity cost and relationship damage done to ever possibly contemplate staying the course.

  • Key Learning: Engage the best possible global legal, entity structuring and tax counsel early in the process (ideally during strategy, target assessment and due diligence). Factor in potential closing risks as a part of each decision “phase-gate” during the M&A process instead of assuming those issues can be worked out after reaching definitive agreement. Set tight “go/no-go” timelines and criteria for the transaction, regulatory and compliance aspects of complex deals to enable executives to “fish or cut bait” earlier in the process rather than later.

Structure & Control Issues. The headline in Reuters on May 9 was as blunt as it gets: “Battle for Control Destroyed $35-billion Omnicom-Publicis Merger.” Other sources concurred, saying things like “relationships between the two sides were seriously frayed”; “tensions were simmering between Lévy and Wren”; “many of the disagreements stem largely from the two CEOs who are playing out a game of high-level brinksmanship”; and “essentially, the battle is over who ends up being the acquirer.” OUCH!

  • Key Learning: While a stock exchange among similarly sized organizations is a common deal structure, from an accounting standpoint, somebody must have a majority control and therefore become the acquirer. This is a fundamental deal point that, if glossed over pre-definitive agreement, will only fester over time. From a practical and integration standpoint, “there is no MOE” because there is a fundamental need to rationalize the organization, its talent, its philosophies, systems, processes and capabilities.

    The only way to do this is to ruthlessly identify and adopt “the best” solutions, regardless of which company they originate from, in order to meet the strategic and financial objectives of the deal most effectively. Attempting to balance outcomes for the mere sake of balance is clearly not best practice. This requires true leadership to architect the vision; make timely, effective decisions on myriad issues while they are still “under construction;” gain senior level alignment; and engage all stakeholders in making this vision a reality.

Cultural Differences. Our nine-part series on culture in M&A extensively covers this issue, and the final article, Winning With Culture in M&A Integration, has a link to each article in that series. As you’ll read in more detail in this series, culture is often used as a catch-all excuse for deal failure, so you have to drill down to specific issues for accurate analysis.

In this case, there are plenty of cultural issues to support these allegations. According to media reports, these examples stand out as substantive differences in the POG deal: compensation philosophies / strategies; decision-making processes and communication protocols; and the role and extent to which a corporate shared services model should be used to drive profit margin by consolidating certain functions across the multiple entities, divisions and lines of business (see Business Model vs. Culture).

  • Key Learning: Culture matters. It is still a predominant deal-failure factor, and it’s hard to get right. Make sure you address culture at the strategy and readiness stage of your deals; include a thorough cultural due diligence in the transaction process; and finally, leaders must redefine the cultural debate to minimize the “us vs. them” connotations by focusing on which cultural attributes will most effectively align and propel a unified, high-performing enterprise. 

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