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Is a ‘merger of equals’ possible for Publicis and Omnicom?

May 01, 2014

FORTUNE – Advertising firms Publicis and Omnicom Group announced plans to merge last summer, but squabbles over position and power are threatening the $35 billion deal. As the Wall Street Journal recently reported, the two companies have not figured out which will legally acquire the other, and executives are battling over who will fill certain high-level positions including that of finance chief.

This is a significant turn of events, given that the firms had positioned their intended marriage as a “merger of equals” -- a phrase implying matrimonial harmony. In a business where the chief assets are human beings, no human being likes the sound of being “acquired.” Top management benefits its employees by projecting soothing, calm thoughts about a combination, instead of projecting the possibilities of layoffs.

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Is this always a good idea? The reality is that mergers of equals haven’t always played out smoothly or successfully as success stories. Try to name any prior merger of equals where you still think of the partners as post-merger “equals.” Ideally, you’ll think of just one merged entity rather than a dynamic duo under one roof. A successful example would be ConocoPhillips (COP), but even that’s stretching the merger of equals line: Despite its billing as a merger of equals, Phillips shareholders owned a greater portion of the combined entity than Conoco shareholders. Technically, Phillips acquired Conoco, and their combined financial statements were framed that way.

In trying to name successful mergers of equals, you’re more likely to name corporate nightmares like DaimlerChrysler -- once billed as a trans-Atlantic merger of equals, later to become a messy trans-Atlantic divorce. In a 
Financial Times
 interview that begot a $9 billion lawsuit from Chrysler shareholder Kirk Kerkorian, Daimler CEO Juergen Schrempp admitted that he called the DaimlerChrysler deal a merger of equals for “psychological reasons,” but added that he had always intended to make Chrysler a division of the automotive group. Why? He claimed no one would ever have bought into the deal if he stated that Chrysler would eventually be a division.

Another merger of equals that failed to live up to the premise of “equality for all”: Duke Power and Progress Energy in 2012. Progress CEO William Johnson was slated to become the CEO of the merged company. Within half an hour of the deal’s closing, Johnson was sacked and replaced by James Rogers, the Duke CEO. Johnson was done in by a board where the majority of directors hailed from Duke (duk). So much for a merger of equals.

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Squabbles over who will occupy the seats of power when the deal is done may be mucking up the merger’s progress, as well as the development of complex tax structures not yet fully approved in Europe. Accounting standards call for an acquirer to be identified at the outset of the deal -- something that their public relations efforts gustily deny is the case. The rules force the financial statements to present a bare-knuckled reflection of economic reality: In business combinations, one company controls the assets of another. It doesn’t matter how you dress up a transaction with symmetrical boards or equally weighted numbers of executive posts: An acquirer must be identified.

Publicis and Omnicom’s initial merger goal was to build a giant advertising and public relations firm that would be better equipped to handle an Internet advertising monolith like Google -- which is a company that gobbles up other companies with no pretext of anything but assimilating them. (It would be pretty hard to imagine any other Google (goog) “equal” in the first place.) Google isn’t worrying about whether its board is proportionally composed of members from companies it acquires, or which executives are named to top posts. If Publicis and Omnicom intend to survive in the post-Google world, maybe both sets of shareholders would be better off if the two companies dropped the whole “merger of equals” public relations chimera and decided who will be the boss.

Jack T. Ciesielski is president of R.G. Associates, Inc., an asset management and research firm in Baltimore that publishes The Analyst's Accounting Observer, a research service for institutional investors.

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