According to eMarketer, global ad spending is expected to reach $577 billion by the end of this year and will grow to $648.56 billion by the end of 2015. Companies are looking for ways to capitalize on the market growth.
One of the largest advertisement companies, Omnicom Group (OMC), is working to strengthen its digital market capabilities. It has recently entered into a planned merger and expanding its footprint in emerging markets.
Merger will leave competitors behind
Omnicom recently signed a deal for 50-50 merger to form a new entity with France based Publicis Groupe (OTCQX:PUBGY), the world's third-largest advertisement and communication company in terms of revenue. The newly formed entity "Publicis Omnicom Group" will now become the world's largest advertisement company and knock WPP Group (WPPGY) from its leading position.
With the previous acquisitions like Digitas, Rosett, and Big Fuel, Publicis increased its exposure in digital media, which will benefit Omnicom's expansion in this advanced technology. As most corporates are focusing on developing their brand image via digital media, the companies complement each other in strengthening their digital operations.
The merged firm is aiming to generate approximately 75% of its revenue from its digital segment by 2018. It is also expected that the merged entity will have synergies of $500 million annually, out of which $260 million is from eliminating work duplication and $240 million from use of common resources and infrastructure. Further, tax savings of about $80 million and more synergies are expected; Publicis Omnicom will have more bargaining power in negotiating deals. The merged company may generate revenue of around $24 billion this year and $25.5 billion next year from $23 billion last year.
On the counterpart, it is assumed that this merger will benefit their rivals like WPP and The Interpublic Group of Companies (IPG), as both Omnicom and Publicis are serving big competitor companies. For example, Omnicom serves PepsiCo (NYSE:PEP), AT&T (NYSE:T), and Microsoft (NASDAQ:MSFT), while Coca-Cola (NYSE:KO), Verizon (NYSE:VZ), and Google (NASDAQ:GOOG) are major clients of Publicis. Traditional companies won't use a media agency serving its competitors; therefore other advertising agencies will have the chance to pick up some of these giants due to Publicis Omnicom's conflicting interests.
WPP as one of the leading players in traditional and digital media, and it has improved and completed a series of advancements to its services. This has placed it in a better position to gain the maximum advantage from the probable conflicting interest in the above merger. With the goal of deepening its footprint in digital media, WPP acquired a 76% stake in NATIVE, the most prominent South African digital marketing firm in June 2013. WPP is very optimistic on its digital capabilities and expects its past acquisition in this segment will enable it to grow further. It has also improved its efficiencies in services like creative, designing, digital media buying, and social media management. The company recently gained the ad campaign for big brands like L'Oreal, Nedbank, Nestlé, and Standard Bank. Moreover, it is planning to grab more digital opportunities by entering into merger, acquisition, and joint venture deals with the digital leaders like Facebook and Google. It is expected that WPP may report year-over-year revenue growth of 7.6% to around $17.1 billion this year.
On other hand, with its subsidiaries like Lowe and Partners, McCann Worldgroup, and Draftfcb, The Interpublic Group has emerged as the most competitive company in digital and media offerings. In order to broaden its capabilities in real time storytelling, production, and content creation, it formed Mediabrands Publishing. This will be managed by its highly efficient and energetic managers, who are have experience in creating original content for big brands like Microsoft, Schwab, AT&T, Brown Forman, and P&G. Therefore, The Interpublic Group expects to gain more ad campaigns in the future, and it may generate revenue of around $3.83 billion in the second-half compared to $3.3 billion in first-half of 2013.
Enhancing footprints in growing markets
To strengthen its presence in Asian and Latin American countries like Brazil, China, and India, Publicis Omnicom plans to expand its business in these regions. The company reported double-digit growth in past quarters in these regions and is focusing on developing its relationship with the technology companies and building its web capabilities in order to continue to expand. It is expected that the company will benefit from the rapid economic growth in emerging markets, which will help it offset the low growth in European markets.
With the potential growth in emerging markets, big brands like Ford (F), General Motors (GM), AT&T (T), and Verizon (VZ), which individually spent more than $3.5 billion on their ad campaigns last year and expect to spend more on their advertisements this year, may benefit the company. By expanding its footprint in these markets, it is anticipated that it will be able to improve its EPS by around 7.3% to $3.86 per share this year and $4.27 next year.
The rising demand for digital marketing is helping advertisement companies gain more business from corporations. Omnicom's merger with Publicis will establish it as the leading media and communication company and enhances its digital capabilities, which will enable it to serve its clients better. Secondly, by focusing on Asian and Latin American markets, it expects to gain more ad campaigns that will result in higher revenue and improved EPS.
With these factors, I recommend a buy for the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.