New York: Since Publicis Groupe SA and Omnicom Group Inc. scrapped their $35 billion merger in May, Omnicom shareholders are coming out ahead.

The two advertising powerhouses are undertaking different strategies after culture clashes kept them from combining. Omnicom has turned its focus inward, renewing a pledge to return cash to shareholders, and its shares have climbed about 9%. Publicis went on to forge its biggest acquisition ever and the stock is down 9%.

Publicis, the owner of the Saatchi and Saatchi agency, announced this week a $3.7 billion takeover of Sapient Corp. to bolster its digital-ad offerings. That drives Publicis’ total acquisition spending to more than $12 billion, compared with Omnicom’s roughly $1 billion, according to data compiled by Bloomberg. Yet their revenue growth is projected to be similar. And Publicis runs the risk of making a big bet on the wrong target, said Albert Fried and Co.

“The market is kind of voting with Omnicom right now," Richard Tullo, a New York-based analyst at Albert Fried, said in a phone interview. “So far, it looks like that strategy is paying off. With the Publicis strategy, somewhere along the lines they may have a miss."

Peggy Nahmany, a spokeswoman for Paris-based Publicis, didn’t respond to a phone call or e-mail seeking comment. Joanne Trout, a spokeswoman for New York-based Omnicom, declined to comment.

Different directions

The companies agreed to a merger in July 2013. The deal would have created the world’s largest advertising company, overtaking WPP Plc. In May, they changed their minds. The boards couldn’t agree on key management roles or integration, a person with knowledge of the matter said at the time.

Since then, Publicis has lagged behind all of its closest competitors. The company, which had a market value of €12 billion ($15 billion) on Wednesday, cut its full-year sales forecast last month and third-quarter revenue missed analysts’ estimates. Chief executive officer (CEO) Maurice Levy said Publicis managers had been preoccupied because of the Omnicom situation.

Meantime, Omnicom, which owns BBDO Worldwide, said its organic sales for the third quarter rose 6.5%, driven by business in North America.

“It’s notable that Omnicom’s numbers and results have been pretty surprisingly good since they withdrew the offer," Tom Eagan, a New York-based analyst at Telsey Advisory Group, said in a phone interview. “You can’t say the same thing for the results over at Publicis."

Sapient deal

CEO Levy was asked on the 23 October earnings conference call why Publicis was distracted while Omnicom didn’t seem to be.

“Can you just point to why your performance is so different and how much longer you expect that to last?" Will Smith, an analyst at Goldman Sachs Group Inc., asked on the call.

Levy responded by saying the Publicis staff was committed to the merger, while Omnicom probably “didn’t believe very much in the merger."

This week, Publicis announced the Sapient purchase, saying it will help the company reach a target of generating half of its revenue from digital offerings three years ahead of schedule. Sapient has worked with clients including Target Corp., Hugo Boss AG and Staples Inc. to develop their digital presence.

Latest, largest

The Sapient purchase is the latest—and largest—in a series of acquisitions Publicis has made as agencies look to capitalize on the growth in digital ads amid falling demand for traditional print and television campaigns.

Publicis bought Digitas Inc. in 2007 for about $1.3 billion and the Razorfish agency from Microsoft Corp. for $530 million in 2009. It then purchased Rosetta Marketing Group Llc for about $575 million in 2011.

Publicis’ revenue may climb 25% by the end of 2018—about the same pace as Omnicom, which doesn’t do many large deals, according to analysts’ estimates compiled by Bloomberg. That’s also the average growth rate for their peers, which include New York-based Interpublic Group of Cos. and France’s Havas SA.

“Omnicom has tended to do smaller ‘tuck-in’ acquisitions and will probably stick with that strategy," said Daniel Salmon, a New York-based analyst at Bank of Montreal. “It also licenses technology, giving it more flexibility than an outright purchase," said Tullo of Albert Fried.

Buybacks, dividends

As Publicis pursues takeovers, Omnicom has resumed using much of its cash on share repurchases and dividends. Publicis also pays a quarterly dividend.

“Omnicom is going back to doing what it’s known to do," smaller deals and returning capital to shareholders, Salmon said in a phone interview. “Publicis is on the other end of the scale. They’ve done some of the biggest, splashiest acquisitions over the past six years."

When asked in May whether Omnicom was looking at doing any other large deals, CEO John Wren said it would be a “very long time" before he tries to do a merger-of-equals again.

Even though Omnicom is outperforming Publicis, they’re trading at similar valuations. Both were valued yesterday at about 10 times trailing 12-month earnings before interest, taxes, depreciation and amortization.

Publicis is paying about 19 times Ebitda for Sapient, data compiled by Bloomberg show. That transaction and its purchases of Saatchi and Saatchi and Digitas rank as the three most expensive acquisitions larger than $1 billion made by an advertising company, based on deals for which the prices were made public.

Omnicom doesn’t need to go out and do a large deal of its own, according to Brian Wieser, a New York-based analyst at Pivotal Research Group Llc.

“Omnicom can continue to march to the beat of their own drummer," Wieser said in a phone interview. “They’re very self contained, somewhat insular. And they’re very disciplined when it comes to price. You would never see something like the Sapient price multiple." Bloomberg

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