* Pitfalls of ‘merger of equals’ emerge amid clash over CFO
* Omnicom, Publicis tie-up delayed by antitrust, tax reviews
* Both sides remain committed to deal - sources
* Dutch tax authorities cool on UK tax residency plan - sources
By Leila Abboud and Tom Bergin
PARIS/LONDON, April 27 (Reuters) - The chief executives of advertising companies Publicis and Omnicom Group are working together to resolve a seven-month-old struggle over who will be chief financial officer of their combined group if the $35 billion merger is completed, three people close to the deal said on Sunday.
John Wren, the head of New York-based Omnicom, and Maurice Levy, his opposite number at Paris-based Publicis, are in regular contact to try to settle the CFO choice, which has fuelled tensions between the two sides since September as they seek to secure regulatory approvals for the blockbuster deal, the people said.
Both remain committed to the tie-up, which would create the world’s biggest ad agency ahead of current leader WPP, added the sources.
The infighting over the CFO shows the pitfalls of trying to engineer a “merger of equals” as the deal was billed when it was announced to much fanfare in July.
Some analysts, investors and rivals have expressed doubts over whether executives and staff in the two companies, especially their veteran CEOs, will be able to effectively work together if the deal is completed. Other mergers with similar profiles, including a 2006 Franco-American tie-up between telecom equipment makers Alcatel and Lucent Technologies, have foundered over culture clashes.
The CEO of rival WPP, Martin Sorrell, said on Friday that most people he was speaking to said there was now a third to a half chance that the deal would not be completed.
The tensions between the top executives of the two companies were first reported by the Wall Street Journal on Friday.
The merger calls for a 50-50 ownership split of the equity in the new company, Publicis Omnicom Group, with Wren and Levy serving as co-CEOs for 30 months from the closing.
The two companies initially aimed to close the deal in the first quarter of this year, but an ongoing China antitrust review and tax jurisdiction issues that were disclosed by Omnicom last Tuesday have delayed completion. Publicis said last week that the deal would close in the third quarter, but Omnicom’s Wren now declines to predict timing.
Omnicom wants its CFO, Randall Weisenburger, to get the top finance job, while Publicis wants its CFO, Jean-Michel Etienne, the people said.
Behind the spat over the group’s finance chief is a deeper question about how the new operation should be run, said two of the people.
To boost profits, Publicis has long centralised many purchasing and support functions for the roughly dozen advertising agencies it owns, such as Saatchi & Saatchi, Leo Burnett and Razorfish. Analysts say the approach has helped Publicis achieve higher operating profit margins than its rivals; its margin stood at 15.9 percent last year, compared with 12.5 percent for Omnicom and 15.1 percent for WPP.
The choice of the CFO could determine whether the new company adopts the Publicis approach or the more decentralised model favoured by Omnicom in which individual agencies have more leeway in everything from technology systems to supplies, the people said.
“There are ongoing talks on the leadership issue,” said one of the people on Sunday. “Wren and Levy are determined to find a solution because it is simply in the interests of both companies. The best guarantee of success is the two CEOs determination to complete the deal.”
The companies also continue to work on resolving tax issues that have slowed down the deal. Wren spooked investors on Tuesday when he disclosed that the companies had not yet been able to get approval for their plan to have a tax residency in Britain, while being legally headquartered in the Netherlands.
Although the British tax authorities sent a positive signal in meetings with the companies over the new entity being tax resident in Britain, the Dutch authorities were not supportive, two of the people said. The Dutch rejected the idea that the new company could be legally based in that country but not be subject to local tax rules.
“The Dutch authorities expressed a desire not to lose their tax sovereignty over the new company to the English,” said one of the people.
One option to solve the problem might be to seek double residency for tax purposes in both Britain and the Netherlands, which is rare but may be workable, the person added.
Publicis and Omnicom continue to work on the issue. The Dutch and the British would have to agree for Omnicom and Publicis’ original British tax residency plan to become a reality.
Another approval needed from France’s tax authority is on track and not expected to pose a problem, the sources said.
Besides the tussle to name the finance chief, there are other signs that relations between the two companies are fraying.
They have not been able to agree on which company will be listed as the “accounting acquirer”, or the buyer from an accounting standpoint, on official filings to the U.S. Securities and Exchange Commission. While the issue is a technicality, it has gotten tangled up in the CFO fight, one of the people said.
Usually in an acquisition, the accounting acquirer is the party receiving the bigger share of the equity and voting rights in the new company. In the Omnicom-Publicis deal both sides are due to receive an equal stake and voting rights in the new company, so a series of criteria must be analysed to determine which side is the accounting acquirer.
Robert Willens, a corporate tax and accounting analyst based in New York, said the dispute over accounting acquirer pointed to a disagreement over management control.
“That could be symptomatic of other, more deep-seated conflicts between the companies,” he said.
WPP’s Sorrell said he would prefer the deal go ahead because in his view mergers of equals don’t work. “I think the best result for us, frankly, would be for the deal to go ahead with joint CEOs, fighting with one another about who’s running the company,” he said in a Reuters Insider interview.
(Reuters Insider: r.reuters.com/qax78v)
Sorrell said the results conference calls from Publicis and Omnicom last week “sounded like two ships passing in the night.” (Additional reporting by Anjuli Davies and Jennifer Saba; Editing by Martin Howell)