Omnicom at twenty
The Omnicom chief executive, John Wren, has combined creative integrity and a humble outlook to build the world's biggest advertising holding company. Caroline Marshall meets him in New York.
When Omnicom opened for business in 1986, the joke around New York's Madison Avenue was that the acronym stood for "operations may not improve considering our merger". It referred to the pedestrian financial performance of three advertising agencies - BBDO, Doyle Dane Bernbach and Needham Harper. They had joined forces to form what is today the world's biggest advertising holding company. Now 20 years old, Omnicom has earned its reputation by marrying stability with success.
Similarly, there is little on the CV of Omnicom's 53-year-old president and chief executive to predict his rise: accountant, ice-rink magnate, chief of Omnicom's Diversified Agency Services. But the hoity-toity attitudes of the advertising establishment provided the perfect cover for John Wren's stealth empire-building.
Tall - very tall, actually - and of solid Irish stock, Wren runs Omnicom from two floors of a Madison Avenue skyscraper. We meet in his understated office: like many top managers, his huge desk is uncluttered by the daily minutiae of business. Down to earth, relaxed and mischievous, he betrays few signs of the lunatic schedule that goes with the job.
Earning an annual salary of $1 million and a bonus of $4 million, Wren is in charge of a group whose net income for the year to December 2005 increased 9 per cent to $790.7 million. Its advertising, media, PR and specialist communications companies serve about 5,000 clients in more than 100 countries. Its subsidiaries include the BBDO, DDB and TBWA networks, the direct marketing agency WWAV and the media brands OMD and PHD.
The dream that became Omnicom was originally called Project Stanhope after the New York hotel where Allen Rosenshine of the then public company BBDO, and Keith Reinhard, of the privately held Needham, met early one morning in late 1985.
Both had identified a need to huddle together for mutual protection amid a frenzy of consolidation. Philip Morris and General Foods was just one of the massive client-side mergers. Saatchi & Saatchi, laden down with bags of other people's money, was intent on storming the Madison Avenue citadel.
The Big Bang, as Omnicom's birth was dubbed, came in 1986 when the publicly held Doyle Dane Bernbach and the idea of a three-way merger came into the mix. The deal aligned BBDO, the sixth-largest agency in the US, with the 12th-ranked DDB and the 16th-ranked Needham Harper.
From its inception, then, this was a marriage brokered by advertising executives who wanted to be housed together in a holding company but did not want to be owned by any of the existing players. None of them stood to make vast personal fortunes from the deal itself because it was a merger in which no agency actually acquired any of the others. A shared commitment to becoming a branded creative superpower held the negotiations together.
As they waited for a "yes" from the DDB board, they were shocked to learn it was considering a bid from the Saatchi brothers. But in the end, DDB opted to join BBDO/Needham. According to the late Joe Daly, then the chief executive of DDB, it boiled down to his board's conclusion that "while the Saatchis had more money, Omnicom had a better idea".
Combined, the three groups added up to the largest advertising superpower in the world, but, as the protagonists immediately noted, this was likely to last only about ten minutes. Soon, Bob Jacoby sold Ted Bates to Saatchis for $507 million, personally gaining $100 million. The next year, WPP bought J. Walter Thompson.
In this febrile atmosphere, Rosenshine and his partners felt it unwise to boast about size. Clients were heaping scorn on the whole agency-merger scene: as they saw it, agency principals were getting rich on their money.
"As a client," RJR Nabisco's chairman icily remarked, "I see disruption but very little value." By the time the dust settled, the merger had cost the three agencies $184 million in lost billings.
The group could not have a name reflecting the constituent parts - an unwieldy alphabet soup of BBDO DDB Needham Harper Worldwide. So Rosenshine came up with the rather antiseptic name of Omnicom. "It was to convey our idea that the group would deliver not just advertising, but all marketing communications," Reinhard recalls.
With a strategic agreement in place that BBDO would remain separate, DDB and Needham embarked on a painful merger. As the marriage revived previous unsuccessful discussions, turf wars broke out all over the world, with each management asserting it was in charge.
Significantly, in a foretaste of the boom market for marketing services, the three founding agencies decided to form a third group to manage their below-the-line businesses. Dubbed Diversified Agency Services (DAS for short), it now accounts for the lion's share of Omnicom's revenue.
Rosenshine, an admired creative, emerged as the leader for the group but Omnicom did not really blossom until Wren's predecessor and mentor, Bruce Crawford, took over running the holding company and Rosenshine went back to managing BBDO. A previous chairman of BBDO Worldwide, Crawford took time out of advertising in 1985 to run the New York Metropolitan Opera. He returned as the chief executive of Omnicom from 1989, handing over to Wren in 1996.
While the pair seem mismatched to some, loyalty and mutual respect has held Wren and Crawford, now 76, together. Wren observes: "Bruce has had one agenda since he appointed me and that has been making me successful, personally and for the company. From Bruce, I get stuff in an unbiased way."
In Omnicom's 20 years, it has made few large acquisitions - in stark contrast to WPP which has gobbled up JWT, Ogilvy, Grey, Cordiant, Millward Brown, Young & Rubicam and many others. Transforming deals, yes, and hundreds of smaller acquisitions, but it is simply not Omnicom's style to enter the bidding wars that surround public companies.
Alan Gottesman, a former Wall Street analyst of the New York-based West End Consulting, says: "John is as distinguished for what he has not done as what he has. He's not a fashionista." Another observer points out that WPP spent £844 million to buy Grey to get Procter & Gamble, while P&G spent £30.2 billion to get Omnicom when it bought Omnicom's Gillette client.
"My biggest acquisitions are normal work for my competitors," Wren says.
"We did not look at Grey. I was not interested. We studied FCB for 11 months and walked away; IPG bought it in 11 weeks. I will not overpay; I do not believe in large acquisitions. I've never seen anyone do a large acquisition where they didn't go backwards."
Omnicom's biggest purchase was Gold Greenlees Trott for $235 million in 1998. Its scale and geography let the group launch TBWA as a third network, until then a pale imitation of BBDO and DDB. The most expensive was Abbott Mead Vickers, part sold to Omnicom in 1990, fully sold in 1998.
Omnicom houses its market research interests in DAS and within the agency groups but it is not a major investment area for Wren. "When we first looked at it, years ago, WPP had already acquired many of the best brands," Wren says. "So we have acquired smaller, quality companies."
If anything, a purchase is likely in media. Is Omnicom, like WPP, still looking at Aegis, home to the buying networks Carat and Vizeum and the market research unit Synovate? "No, no, no, no," he says, with perhaps a little too much emphasis. What about Media Planning Group, if it decides to cut its ties with Havas? Wren will not comment on this, but it is telling he has continued to nurture the close business relationship that Crawford first established with MPG's founder, Leopoldo Rodes. "Fernando Rodes (Leopoldo's son, MPG's chief executive) is a world-class individual," he says.
Throughout its existence, Omnicom has taken a unique approach to one of the biggest issues in business: parts and whole. In other words, which powers and responsibilities lie with the corporate centre and which with individual operating companies.
Here, Omnicom and WPP (the two leading groups in the industry) are polar opposites. WPP is the classic command-and-control centrist: positioned as a parent company (albeit with offspring more than 100 years older than the parent), WPP is positioned as an operating entity in its own right.
Reflecting this approach, its glossy annual report acts as a marketing document for WPP's chief executive, Sir Martin Sorrell, for WPP and the group companies.
Omnicom, by contrast, publishes an annual report so self-consciously basic that Wren cheerfully admits it is "boring". "I don't even get to pick the colour for the front page," he says. "Showy reports are just ego for the boss - I would rather send people home with bigger bonuses."
Its hands-off stance has convinced many entrepreneurs, including the iconoclastic founders of Abbott Mead Vickers, TBWA, Goodby Silverstein & Partners, OMD and PHD, to sell their precious companies to Omnicom. "He's convinced a lot of people that, top price or not, Omnicom is the place to sell your company. He's made a cult of operating company autonomy," Gottesman says.
Arguably, the downside has only emerged in recent years as holding company pitches - where brands reap economies of scale by using a single holding company's capabilities in a number of disciplines - have arrived. The pitch for HSBC in particular, won by WPP in 2000, seemed to highlight a lack of cohesion within Omnicom. Its scale and credibility in Asia could not match that of WPP, which won the £342 million business. Did Wren disregard growth markets? "No, Martin won HSBC by fixing a problem Bates had in China. He did it brilliantly and we were less than brilliant," he says.
"But I don't need to be hit in the head twice. In many ways, I'm blessed by coming in when I am. My competitors have trained some talented people and I can have them come work for me.
"Fact is, the clients weren't clamouring for us to be there, so Asia didn't get the same priority. However, by managing Asia through the agency brands, everything was having to come up through a labyrinth to get to New York. I sent Michael (Birkin, the worldwide president of DAS since 1999) out in the new position of head of Omnicom Asia-Pacific. I also appointed Serge (Dumont, a French businessman with long experience in Asia) as the president of the region. We will be pulling our weight in a very short time."
The unravelling of WPP Group's global arrangement with Samsung, plus Bartle Bogle Hegarty's success in securing tie-ups with big brands, have cast doubt over the future of holding company mega-deals. Does Wren doubt their staying power? "We've learned more from the ones we lost than the few we could claim we won," he says, choosing his words carefully. In his view, do they push prices down? "I don't know," he says. "But if you accept a piece of business for less than a fair price, logic says put your weaker people on it and do a worse job."
Omnicom's subsidiaries compete head to head and the plan is that each will offer full service before long. In fact, Omnicom has been there for a while in Europe - witness AMV's mini-conglomerate of companies. It is in the US that a separation exists.
"Clients are looking for greater coordination of some key resources that represent 70 per cent to 80 per cent of their marketing spend: general media advertising, the internet, CRM, retail activation of the ideas and so on. Because we have three great agencies that have never lost their way in terms of creative prowess, and because the three leaders buy into this view of what clients require, we have been working to align some of our DAS companies more closely with the agency groups. We will not merge them, but we want to create an environment where they think alike, talk alike and pitch alike."
The alignments, for instance, will see BBDO align with Organic (interactive), Proximity (direct response, although it is already part of BBDO) and Atmosphere (also an existing part of BBDO, for retail marketing). DDB will team up with Tribal DDB (interactive, aligned since it was founded by DDB, although it will lose the DDB part of its name if Wren has his way), Rapp Collins (direct marketing in most markets) and TLP (brand activation). TBWA will team up with Agency.com (interactive), the Integer Group (retail activation) and Tequila (direct response).
There are tensions galore in this scenario, mostly because individual companies will continue to have separate P&Ls. Why should they look at things from a group standpoint? Citing as his biggest mistake "not pushing integration harder and faster", Wren is determined to make it happen.
But hard and fast is not the Omnicom way. "Our pace is slow, and we are criticised for that, but we are slow for a reason. I can reorganise anything at a moment's notice but that does not mean it will be effective," he says.
In June 2002, it emerged even Omnicom could not dodge all the bullets.
Rumours that an article critical of the company was set to appear in The Wall Street Journal made a significant dent in the group's share price.
The piece raised questions about accounting for acquisitions, which it seemed to suggest left room to massage figures, allowing Omnicom to show a flattering picture of growth. It also suggested a boardroom rift concerning Seneca, a business set up to house Omnicom's internet assets. There were also questions on the earnout liability faced by Omnicom, levels of cashflow and debts that stood at $2.9 billion.
Analysts pointed out that there was nothing new and no evidence of wrongdoing in the report, but in a post-Enron market waiting for the next high-profile disaster, it did not take much to spook investors. A week after publication, Omnicom had lost almost one-third of its value.
Wren, by common consent, dealt brilliantly with the crisis, though, as shareholder class-action suits arising from it are ongoing, he will not comment on it today. A conference call for analysts dealt with the article's points one by one. It was riddled with "improper innuendos", Wren said.
The method Omnicom uses to account for acquisitions is more aggressive than its rivals, but, the company said, falls within guidelines. Earnout liability is currently up to $450 million and manageable. The resignation letters of two directors, including the chairman of the audit committee, were posted on the company website with the aim of proving neither had gone in protest. Seneca, Omnicom added, has no debt - a clear nod to distance itself from the off-balance-sheet vehicles at Enron that hid huge debts and ultimately sunk the company and led to its auditor, Arthur Andersen, being found guilty of obstructing justice.
Lorna Tilbian, an analyst at Numis Securities, says: "As Arthur Andersen was then its auditor, Omnicom was instantly guilty by association and Wren's decision to go to KPMG, an arm's-length choice, was right: KPMG reaudited Q1 and Q2 and gave Omnicom a clean bill of health. Indeed, complying with Sarbanes-Oxley cost it $65 million in 2004."
The one area where Omnicom plays a branded role in providing services to clients is media, where it has increasingly directed the global development of PHD and OMD and its specialist media companies, through Omnicom Media Group. What about media in the new world order? "There's no change there because media is already owned by the three agencies, they all sit on the board of OMG, the profit is shared by them," Wren says.
Where will online media sit? Wren hedges: "By the end of the first quarter 2006, we'll have a clear strategy on online media. All I will say is planning should stay with creative, and buying needs to be aggregated in an organisation similar to OPera in the UK. There are companies that look at the internet from a behavioural point of view, which need to be added to the mix."
Compared with WPP and Publicis, Omnicom has seemed a little half-cocked in media. According to the industry standard measurement of Recma, it is third in the market, behind WPP and Publicis. Wren's ready for the comparison: "On media clout, which Recma measures, you have to be big enough to be efficient for your clients - you don't have to be number one. On the other key measurement, quality, I'd argue Omnicom is num-ber one." The performance of PHD (Campaign's reigning Media Agency of the Year) and OMD (Media Network of the Year) bears this out.
Today, Omnicom employs more than 60,000 people. Wren likes to say the holding company's main role is talent management and attraction. "For a lot of reasons, largely because of what the industry didn't do in the 80s, we decided ten years ago to do extensive training of our people as we brought them in. We started a successful venture, Omnicom University."
It is a laudable initiative. That the heads of BBDO, DDB, TBWA, OMD, PHD and DAS were all appointed by Wren also suggests a crucial level of talent has been locked in on his watch. But recent evidence from the London market suggests senior talent is leaving the group: Trevor Beattie; Johnny Hornby; Paul Hammersley ... "Three people, and all for individual reasons," Wren counters. "I don't want people staying if they don't want to. I'm so self-confident about Omnicom that they will either be a success or, if not, they will be back."
It is typical of this attitude that Wren has no contract with Omnicom.
He could sever his links with his employer at a moment's notice - and vice versa. Like the agencies that chose to create the thing in the first place, his line is that he chooses to remain there.
Still, Wren promised to do the job for ten years ... ten years ago. Any ambitions to run an even bigger Wall Street player? "I think I'm in my last job," he says. "I'm probably going to be part of the company forever, but I will not run it forever, because our traditional competitors may turn into, say, Google and Yahoo! and someone else will be better placed to do it."
The sense is Wren is pleased with his contribution and with Omnicom's performance. He should be: his personal stock matches that of the company. True to its founding principle of creativity, TBWA, BBDO and DDB hold first, second and third places respectively in the 2005 Gunn Report.
Wren is proud to work in a supportive environment where failure is not a crime: "The thing that works about Omnicom is that to meet Wall Street's expectations, we do not need all the units to be performing at their best.
If bad things happen to good people here, the system can absorb it; we'll still deliver externally what we need.
"I owe my success to the people who work here; I think of them as family members, and I wouldn't hold on to the trappings and all the nonsense in any way that would limit their success."
And with that, clearly enjoying the limelight and the nonsense $5 million a year brings, Wren sets off for client meetings in Detroit in a private jet.
TWENTY YEARS IN THE LIFE OF OMNICOM
1985: Allen Rosenshine and Keith Reinhard, heads of BBDO and Needham respectively, meet in secret to discuss a merger.
1986: SP $7.13
April sees the final night of negotiations, with DDB now in the mix. Its board rejects a bid from the Saatchis. BBDO remains separate, while DDB and Needham are to merge. Clients, including Campbell's Soup and Heinz, baulk at the prospect of sharing an agency with competitors.
1987: SP $7.19
Financial results are depressingly poor. But large clients begin to arrive - including new Pepsi business and Pizza Hut.
1988: SP $5.50
1989: SP $6.44
Bruce Crawford, a former chairman of BBDO, arrives to run Omnicom. Rosenshine returns to what he does best - running BBDO. Crawford sets about transforming DAS into a home for fewer, leaner, integrated agencies. He simplifies the management structure, minimising overheads. BDDP, the French group, bows out of the battle for Boase Massimi Pollitt, clearing the way for Omnicom's £125 million bid.
1990: SP $6.88
1991: SP $8.50
Recession strikes. WPP issues a profit warning in late 1990, when analysts tot up its mountain of debt and advise investors to flee. Omnicom survives with little pain by keeping costs low, especially interest expenses. Its agencies earn numerous creative awards. Crawford's strategy is clearly beginning to work with revenues up to a robust $1.2 billion and consistent profit growth. AMV sells a minority stake to Omnicom.
1992: SP $10.47
Omnicom acquires Goodby, Berlin & Silverstein.
1993: SP $11.88
TBWA, founded in Paris in 1970 by the American Bill Tragos, is acquired.
1994: SP $13.44
Omnicom buys the biggest direct marketing agency in the world, WWAV.
1995: SP $18.75
Omnicom fuses TBWA with the newly acquired hotshop Chiat/Day to form the TBWA International network. Omnicom records an 18 per cent increase in revenues to $2.3 billion.
1996: SP $26.06
Omnicom establishes PR clout by buying Ketchum.
1997: SP $42.38
Crawford steps down as CEO, becoming chairman. Wren takes control. DDB wins back McDonald's after a 15-year absence. Fortune selects Omnicom as its most respected advertising group. The Wall Street Journal ranks it top on total return to shareholders.
1998: SP $58.50
The year sees the biggest acquisition in Omnicom history. Michael Greenlees' GGT Group, rocked by the loss of the £75 million Procter & Gamble account, agrees to a $235 million takeover. This lets Omnicom merge GGT with TBWA, still a pale imitation of BBDO and DDB, as a third network, TBWA Worldwide. Omnicom buys the PR company Fleishman Hillard.
1999: SP $107.50
Boosting its position in Europe, Omnicom buys the remaining AMV shares for £346 million. The deal values each AMV share at 448p - 24 per cent more than the company's closing price before talks were announced. Omnicom has now bought all of the UK's leading second-wave hotshops: BMP, AMV and GGT.
2000: SP $100.94
BBDO wins the largest account in the automotive industry, the $1.8 billion DaimlerChrysler business.
2001: SP $98.20
BBDO, TBWA and DDB decide to turn OMD Europe into a single business entity, combining all three agencies' media planning and buying assets across Europe. Colin Gottlieb as CEO sets about running the businesses. Omnicom acquires Wolff Olins, the corporate brand consulting company.
2002: SP $97.35
Rumours that a critical article on Omnicom is set to appear in the Wall Street Journal make a dent in the group's share price in June. When a lengthy report does finally appear, the sheer volume of column inches sends Omnicom into a tailspin. In a week, the business loses almost one-third of its value. Wren speedily confronts the crisis.
2003: SP $87.60
2004: SP $88.82
The Omnicom-owned media agencies OMD, Manning Gottlieb OMD and PHD pool their media negotiations to create OPera, the UK's largest buying point.
2005: SP $91.48
Bank of America selects a team of Omnicom shops, including BBDO and OMD, for its $600 million account.
Graph Data Source: SunGuard Powerdata (Tradeline)
Note SP = share price.
This article was first published on campaignlive.co.uk
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