The merger between advertising giants Omnicom and Publicis
created news for a long time, until the day when the cancellation of their
merger created news. What happened? The story reported by Wall Street Journal involved
many operational issues such as incorporation, choice of who firm to make the
formal acquisition, and regulatory approval, but it was also pretty clear that
the relations between the firms had become problematic. The CEOs clashed over a
number of issues related to the new organization, such as its location (Omnicom
is a US firm, Publicis is French) and key staffing choices. In the end, the firms
called off the plans and both CEOs admitted that the relation between the
potential merger partners had not been good enough.
Is that a good reason for calling off a merger? Possibly,
but it is one that gets too much focus because such internal relations are
relatively small-scale and temporary. For example, one of the CEOs, Publicis’s
Levy, was supposed to retire soon but had not done so because of problems
finding a successor. But relations are still important for merger success,
except they are a different kind of relation. All firms have relations with
other firms, as alliance partners, suppliers, or customers. Not all relations
are important, but some are, like key client relations are for advertising
firms. Managers pay surprisingly little attention to what kind of relations would
be best for a merger, and even researchers have overlooked the issue.
A recent article by Michelle Rogan and Olav Sorenson in Administrative Science Quarterly addresses it by looking at mergers, and in
fact mergers among advertising firms. Their focus is on whether firms are more
likely to merge with each other if they share clients, and whether mergers have
lower performance when the firms share clients. The reasoning is simple. Shared
clients means familiarity because the firms are close competitors, and it can
also mean over-confidence in the results of the merger. Shared clients also means
that little new is added by the merger, because the merged firm gets a deeper
relation with existing clients rather than a broader set of clients. Two
problems follow. First, the client may not want to have a deeper relation because
it sees the advertising firm as trying to gain power (Michelle Rogan and I have an article about this). Second, the firm will fail to build complementarities
in its client portfolio, which can hold back innovations (my book with AndrewShipilov and Tim Rowley discusses this). So far theory.
What did they find? Evidence showed that the theory was correct on both
accounts, meaning that the firms made exactly the wrong mergers. They merged
when sharing clients, and shared clients meant that the performance was reduced
after mergers, both when looking at loss of clients and in looking at billings
per client.
So the conclusion is clear. When looking at whether to merge or
not, relations really matter. Except that the relations that matter are between
firms, not between CEOs.
