Is Bigger Always Better?

The merger of Omnicom and Publicis, two giants in the advertising, marketing and corporate communications industry, is raising questions as to if bigger really is better. In the New York Times article, “Small Fry Feed off Merger of Big Fish”, Elliott describes the smaller competitors in the industry, such as Copacino & Fujikado, as gaining clients due to the new giant merger. Mike Hayward, creative director at Copacino & Fujikado, describes that instead of advertising the fact that his company won the small advertising agency of the year award for the North West region from Advertising Age, he is capitalizing on the merger of Omnicom and Publicis by juxtaposing the size of his company to the new mammoth company that is soon to be created. Hayward accomplished this by paying for a mock congratulatory billboard, featuring creatures resembling King Kong and Godzilla shaking hands, with the caption, “Congrats to Publicus and Omnicom”. Shortly after, a company from Beijing contacted Copacino &Fujikado and asked to work with them.

Is bigger really better? If a company becomes a monopoly, they can set their own market price where mr=mc, and thus maximize their producer surplus. At this price, the monopolist is under producing in order to make more money for himself. In a competitive market, companies do not have the power to do this, and thus their producer surplus is much lower. Thus, it is logical to conclude that being a monopoly is better for a company than competing against many other competitors.

The question now becomes, how can a company become a monopoly? One method to accomplish growth is through mergers and acquisitions. By merging or acquiring another company, the conglomerate of the two companies compile their separate market shares into one larger slice of the market. In theory, this is working towards creating a monopoly because there are fewer firms to compete against, and also the two companies can pool their resources together to invest in rent-seeking, in order to work towards the goal of controlling a larger portion of the market.

However, with mergers and acquisitions there are negative and positive synergies. In the case of Omnicom and Publicus, there seems to have been a negative synergy of actually losing business to their competitors. Since Omnicom and Publicus are advertising and marketing firms, clients are viewing the size of the merged companies as a negative aspect. For advertising and marketing, quick and strategic action is crucial for success. It seems that clients are viewing the merged companies as being too large, and therefore will lose their flexibility in exchange for a large, clunky operation. It is this perspective that Copacino & Fujikado capitalized on with their tongue in cheek billboard.

Thus, the nature of a company influences the way that they can successfully grow a monopoly. If Omnicom and Publicis were diamond companies, the merger would capitalize on an even larger portion of limited natural resources, and thus the merger would be a successful step towards creating a monopoly. The merger also might be successful if Omnicom and Publicus were technology companies, because then the merged company could utilize increased market share through capitalizing on network externalities. However, since Omnicom and Publicis are advertising and marketing companies, the merger may not work in their favor. As Elliott pointed out in his article, the transaction has already created unforeseen negative synergies.

Article: http://www.nytimes.com/2013/09/23/business/media/small-fry-feed-off-merger-of-big-fish-omnicon-publicis.html?ref=business

 

One thought on “Is Bigger Always Better?

  1. Jargon: diseconomies of scale.
    Concept I: barriers to entry.
    In a “talent” industry are low, it certainly is feasible for a group of individuals to set up their own boutique, though I’m sure O&P will try to insert noncompete clauses in contracts with employees. I don’t know labor law, but I suspect that is hard to do beyond a year or two. On the other side customers may sign contracts, but again those are surely no more than a year or two in length and would have lots of escape clauses and areas where exclusivitity is not binding.
    Concept II: economies of scale.
    Let’s assume that there really is an observed increase in size, and not just this one firm. (I know of other mergers, so I think it’s more general.) That begs for sources of scale economies or scope economies. I can think of one area, which is global branding. A loose alliance of national firms can do that, but may offer too little coordination and too many lines of communication. If you know Spanish, many, many years ago GM managed to brand a car they intended to sell throughout the Western Hemisphere the “Nova”. But is that really enough to explain size? I doubt this is more than one piece of the story, and maybe not a very big piece at that.

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