Omnicom gets Ketchum - a giant merger that bodes well for L.A.

Omnicom Group Inc. Even its name is scary, implying All Communication. The New York firm that plans to gobble up Pittsburgh-based Ketchum Communications Holdings Inc. is probably the third biggest advertising/public relations holding company in the world. After the Ketchum acquisition, its annual billings in L.A. County alone will be well over $1 billion, utterly dominating the local industry.

The mid-sized firm in America has become an endangered species, not only in the advertising business but in banking, insurance and a host of other service-sector industries. Usually, news of big acquisitions like the proposed Omnicom-Ketchum deal comes as bad news to local communities. Big mergers mean big layoffs - that's ordinarily the entire point behind these deals. Companies acquire other companies so they can consolidate operations and save money by cutting people.

And what Los Angeles needs is not more layoffs.

Fortunately, though, advertising/communications is a different sort of animal from other industries. Although there almost certainly will be layoffs at Ketchum, despite what the suits are saying in New York, the people most likely to get cut are the bean counters at Ketchum's head office in Pittsburgh whose administrative functions can be handled more efficiently by the parent company. Here in L.A., Omnicom's various divisions are likely to continue to operate much the same way they do now, and the improved services offered by the combined companies might just lead to job growth locally.

The reason, as explained by Ketchum Vice Chairman Craig Mathiesen, is that too much consolidation in the advertising business can do far more harm than good.

Let's say Nissan has a contract with Joe Bob & Associates to produce its television campaign. Meanwhile, Honda is a major client with Billy Ray & Elvis Advertising Inc. The corporate parent of the Joe Bob shop buys up Billy Ray & Elvis. If the parent wants to merge the two agencies, it's going to have to decide which megabucks client - Nissan or Honda - it wants to give up, because it's extremely unlikely that clients in direct competition are going to give their business to the same advertising agency.

"It's very screwy in the advertising business," Mathiesen said. "Conflict is in the eye of the client, so competing clients rarely pick the same agency."

The only way to avoid that situation is to maintain Joe Bob and Billy Ray & Elvis as completely independent, and even competing, agencies. That's the strategy employed by Omnicom, which locally owns Chiat/Day Inc. Advertising in Venice (L.A. County's biggest ad agency), and the West L.A. shops BBDO and DDB Needham. All of these are technically just divisions of Omnicom, but they compete against each other for business and maintain entirely separate operations. As a result, BBDO is able to count Twentieth Century Fox among its clients, while DDB Needham serves competing studio Universal Pictures.

For Ketchum, finding a larger buyer was not only necessary, but almost inevitable. Medium-sized agencies have found themselves unable to compete in the 1990s either with giants like Omnicom, which can offer superior services at lower cost through their networks of subsidiaries, or small "boutique" firms that emphasize their greater creativity.

"The creative element can be a problem for the larger firms," said David Stewart, chairman of the marketing department with the University of Southern California's School of Business Administration. "There tends to be a homogenization of the creative product at large firms, and that's why there's been an opportunity for smaller companies to stake out a niche."

Under the Omnicom umbrella, Ketchum will be able to offer its clients services provided by its sister divisions, and take advantage of its corporate parent's global reach. Size, according to Stewart, also has advantages when it comes to media buying because larger companies have more leverage to negotiate discounts with the media.

Locally, Ketchum operates three divisions: Braun Ketchum Public Relations, Ketchum Advertising and Ketchum Directory Advertising, which designs ads for yellow pages. All told, the company has 210 employees in L.A. County and does about $150 million in annual billing, Mathiesen said. Ketchum's advertising division is already the fourth-largest ad agency in L.A. County and boasts clients like Acura, Kentucky Fried Chicken and PacifiCare of California.

Stewart believes the pending acquisition will place added pressure on mid-sized agencies still operating in L.A. County to merge with bigger companies. Ketchum's competitors are going to find it harder to deliver the same value at the same cost as the suddenly expanded Ketchum.

But for boutique firms, the acquisition could actually do more good than harm.

"Now there's even more of an opportunity to position yourself as a secondary supplier," Stewart said. "The creative shops will emphasize their differentness and low overhead. Most likely, they'll start marketing themselves by saying, 'We're not Omnicom.'"