The Not-So-Jolly Advertising Giants

By Stephen Koepp

The fanfare on Madison Avenue was deafening last spring when the two largest advertising mergers in history were announced within two weeks of each other. The power of the newly created superagencies and the vast riches that changed hands in the transactions stunned the ad industry for weeks. The first jolt was the three-way agreement in April to merge the sixth largest U.S. agency, BBDO International, with Doyle Dane Bernbach Group (No. 12) and Needham Harper Worldwide (No. 16). Their combined annual billings of $5 billion made the new agency, now called Omnicom Group, the world's biggest -- for a moment anyway. The commotion reached another peak two weeks later, when Britain's acquisitive Saatchi & Saatchi agreed to buy Ted Bates Worldwide, the third ranking U.S. agency, to create yet another world's largest ad group, this time with billings of $7.5 billion.

During all the hubbub, one influential group of bystanders seemed ominously quiet. They were the clients: the food companies and soapmakers that had grown accustomed to undivided attention from the ad agencies. Now that the merger mania is over, many clients are passing loud and painful judgment on the results. Their verdict so far: bigger is not necessarily better. An unprecedented parade of coveted clients has quit the two supergroups for smaller agencies. One such advertiser is RJR Nabisco, which took away $32 million in accounts (example: Fleischmann's margarine) from Omnicom and $96 million from Saatchi & Saatchi/Ted Bates. Declared RJR Nabisco Chairman J. Tylee Wilson, speaking at an advertising convention two weeks ago in Virginia: "The wave of mergers has benefited the shareholders and managements of the agencies, but I'm the client. I'm selfish. Show me how the mergers will improve service."

All told, Omnicom has lost more than $100 million in billings from the flight of customers, which include Sears, IBM and Pillsbury. The damages at Saatchi & Saatchi/Ted Bates have totaled more than $300 million; among the clients who canceled accounts were Colgate-Palmolive, Procter & Gamble and Warner-Lambert. While both agencies claim that they can absorb those losses without severe stress, the exodus of blue-chip clients has quickly soured Madison Avenue's merger mood.

A messy personnel struggle in September at the top of Ted Bates aggravated the feeling among some advertisers that power hunger or greed might be the true motivating force behind the mergers. Chairman Robert Jacoby, even after taking home an estimated $100 million of the $450 million merger price, proved unwilling to give up authority to his new bosses, Admen Charles and Maurice Saatchi.

Jacoby brought the conflict to a boil when he abruptly pushed aside a potential successor, Donald Zuckert, president of Ted Bates Advertising/New York. At the same time, Jacoby elevated two of his favorites without getting any nod from the Saatchis. The brothers retaliated by dumping Jacoby from the top job and installing Zuckert. The combative Jacoby heightened the melodrama, whether intentionally or not, by removing his portrait from a prominent wall at the agency and by accusing the Saatchis of breaking his five-year contract. "I don't know what happened. They hadn't told me they were going to do this," Jacoby says now.

The executive suite at Omnicom, where former BBDO Chairman Allen Rosenshine is in charge, has been comparatively tranquil. "It seems to be working," observes Harry Paster, executive vice president of the American Association of Advertising Agencies. "They have added some strengths to each agency that they didn't have individually." But Omnicom has a worrisome growing pain: the refusal of some advertisers to deal with an agency that handles any archrival products. The merger of three agencies brought together under one roof many combinations of fiercely competitive consumer goods. Pillsbury, for example, which had cake and frosting accounts with Omnicom, withdrew $30 million in business because another branch of the combined agency represents Betty Crocker mixes.

The same problem may be proving even more formidable for Saatchi & Saatchi/Ted Bates. Colgate, a Bates client for 46 years, took away $100 million of its business, primarily because the combined agency would be handling many products of its nemesis, Procter & Gamble. Later P&G became disgruntled and pulled $85 million worth of Saatchi & Saatchi accounts, notably Luvs diapers, Bounty paper towels and Crisco oil.

At the time of the mergers, the supergroups boasted that their worldwide reach would help advertisers sell their products in the increasingly multinational marketplace. That may be so, but some clients evidently believe that the bulking up of the agencies will create as many drawbacks as benefits. One concern is that creativity will be stifled in such large organizations. Morale could suffer too, because of the layoffs that will be needed to eliminate redundant jobs. Concedes Rosenshine: "There are loyalties and relationships that may have to be reorganized. Those are difficult."

A longer-term fear among advertisers is that the size of the supergroups will change the traditional relationship in which the agency is subservient to the client. Says one agency executive: "Clients are really saying, 'When I holler, I want you to jump.' They see some of this power slipping away." As a result, the departure of clients from the mega-agencies has created a windfall for their somewhat smaller competitors. Young & Rubicam has picked up about $120 million in billings from unhappy clients who went shopping for a not-so-giant agency.

With reporting by Jeanne McDowell/New York