ANALYSIS: Omnicom’s strategy, growth pressures and acquisition shopping list

Chris Pash
By Chris Pash | 22 October 2019
 
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Omnicom has done well in the growth stakes so far this year but will be under pressure to maintain that, analysts say.

Organic growth, a widely used measure in advertising which excludes foreign exchange fluctuations, was 2.2% for the third quarter. This compares well to Publicis Groupe which earlier this month report a 2.5% drop in organic growth. 

Industry analysts MoffettNathanson say the holding group has focused on building core businesses while divesting underperforming and non-core assets.

“We have seen the fruits of their labor, with organic growth steadily in the +2% to +3% range,” the MoffettNathanson analysts write in a note to clients.

And all the time, Omnicom has been improving its profit margins.

“In the meantime, they appear to be on the right side of large account reviews, with the Ford and US Army wins going fully into effect this quarter,” the analysts say.

“However, given the portfolio rationalisation to date, we question how much (slow-growing/lower margin) fat is left to be trimmed from the organisation.

“Also, advertising/media account wins may not be enough to accelerate top-line growth for the company, given underperformance from other businesses in the group (such as Public Relations and CRM Execution & Support).”

The MoffettNathanson analysts expect margins to stabilise in 2020 rather than continuing the expansion streak.

“So, we believe there will be greater pressure on Omnicom to maintain its positive organic growth, especially in an industry that is not growing in aggregate,” the analysts say.

As well as cutting the slow growth business units, Omnicom is also pursuing acquisitions in data analytics, digital transformation, precision marketing, and healthcare.

“We won’t throw reckless money at things we’re capable of building, so we’re very disciplined about the acquisitions we make,” Wren told an analyst briefing.

Omnicom CFO Philip Angelastro told the analysts: “To the extent that, as John said, we can find more deals in the areas that we’re particularly interested in, we’re going to pursue them.”

In his third quarter earnings statement, Wren says the company is in a “very strong” competitive position”.

He says the strategies are centered around hiring and retaining the best talent, driving organic growth by evolving service offerings, improving operational efficiencies, and investing in areas of growth.

"As part of this process, we are continually making internal investments in our agencies across all of our practice areas, as well as pursuing acquisitions particularly in the areas of data analytics, digital transformation, precision marketing, and healthcare,” he says.

Omnicom is currently launching new offices in New York and Chicago.

Digital is a focus

Wren says good progress has been made on enhancing capabilities in digital transformation, machine learning and audience-centric services.

“Over the past few quarters, we have made good progress on enhancing our capabilities in digital transformation, machine learning, and audience-centric services,” he says.

In the third quarter, Omnicom acquired a majority stake in Smart Digital with platforms delivering large scale, real-time personalisation solutions that enable individual brand experiences and increase loyalty.

“It significantly strengthens OPMG’s offerings in decision sciences, automation, and machine learning,” Wren says.
Smart Digital follows Omnicom’s acquisition of Credera which overlays management consulting and digital transformation on top of existing CRM and digital offerings.

“In a little more than a year, Credera has helped us forge stronger relationships and partnerships with many of our multinational clients,” he says.

“The acquisitions of Smart Digital and Credera have built upon OPMG’s already strong ability to work with clients from the very beginning of developing a marketing transformation strategy all the way through to campaign execution.”

Smart Digital and Credera are aligned with Omni, Omnicom’s analytical service platform.

Publicis Groupe earlier this month downgraded its earnings forecasts, citing cuts from a handful of traditional advertising clients in FMCG/retail mainly in the US, and tough competition in media operations.

Omnicom's call with analysts:

Michael Nathanson of MoffettNathanson asked Wren: Given the problems that these European competitors (Publicis) of yours have in North America, it’s pretty obvious they’re losing a lot of share here to you. Are you seeing any change in the competitive pressure to either retain talent or on deal terms, or anything that you see happening in the marketplace due to their weakness?”

Wren: “Not that I could call out individually. We think we have the best talent in the industry and we’re always in an effort to acquire more of that better talent. In that regard, there’s a lot of recruiting that goes on within the industry.

CFO Philip Angelastro: “I don’t think we’ve seen dramatic changes in terms of deal terms, and it certainly hasn’t eased … as a result of our competitors maybe being less active on the acquisition front.”

 

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