Omnicom Expands in China - Analyst Blog

Ketchum, the global marketing and corporate communications consultancy arm of Diversified Agency Services (DAS) division, a unit of Omnicom Group Inc. (OMC), has taken a majority stake in its Greater China operations.

Increasing stake will enable Ketchum to provide varied range of services and meet growing demands of China, the fastest growing economy of the world.

Typically, Omnicom's strategy revolves around acquiring complementary companies with strong entrepreneurial management teams to expand its client base. During fiscal 2009, Omnicom acquired 4 subsidiaries and increased its stake in various existing ones.

Recently, Diversified Agency Services (DAS) acquired the U.K.-based design and communications agency, The Core.

The increased integration process would enhance its client base, which is its key growth strategy as Omnicom's business revolves around its clients. Current improving economic conditions should also benefit Omnicom as they help to increase client spending.

Omnicom has improved coordination between the diverse advertising and marketing strategies of its global customers, which should augment cross-selling opportunities across its businesses.

However, this huge dependence on clients is risky as the loss of a client or reduction in client spending would adversely affect the company's results. An intensely competitive advertising environment and pricing pressures remain causes of concern.

Omnicom's direct competitors are Interpublic Group of Companies Inc. (IPG) and WPP plc (WPPGY). However, management remains committed to expand its business and relationships in Asia, where operating conditions remain extremely favorable. This should improve the long-term profitability of the company.

As markets are picking up, the improving economic conditions should benefit Omnicom as they help to increase the consumer spending. We continue to rate the stock as Neutral in the long term. The stock's short-term rating also remains Hold with a Zacks #3 Rank.

 
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