(Corrects paragraph 3 to show Omnicom CEO as John Wren, notJohn Levy)
* Merger of equals founders over power struggle - Levy
* Tax, regulatory issues had held up closing
* Analysts see tougher times, M&A ahead for ad sector
By Anjuli Davies, Soyoung Kim and Leila Abboud
LONDON/NEW YORK/PARIS May 9 (Reuters) - The $35 billionmerger of U.S.-based Omnicom and France's Publicis collapsed on Friday after a battle for controldestroyed plans to create the world's largest advertisingagency.
The deal, heralded in July as a merger of equals that wouldenable the two agencies to compete more effectively in thedigital arena, foundered on issues ranging from its complex taxstructure to the firms' divergent cultures. The two sides werealso losing major work - more than $1.5 billion in the pastmonth alone - and did not want to let the uncertainty continue.
"I have not been able to convince John that balance isbalance," Publicis Chief Executive Maurice Levy said of hisOmnicom counterpart John Wren.
"Omnicom wanted their people to fill the CEO, CFO andgeneral counsel jobs," he told Reuters. "I thought that went toofar. I was not ready to cede on this point."
For his part, Wren said the two sides had failed to find away past the strong corporate cultures that existed in eachcompany.
"There was no one factor," Wren, 61, told Reuters.
"There are a lot of complex issues we haven't resolved.There are strong corporate cultures in both companies thatdelayed us for reaching an agreement. There was no clear finishline in sight, and uncertainty is never a good thing when youare in the personal service business."
Two people familiar with the situation said relationsbetween the two sides had started to unravel in December, withtensions starting to develop between Levy and Wren, and theFrenchman believing that the deal was turning into a takeoverrather than a merger.
One person said the men met two weeks ago to agree what todo.
The key dispute over who should be CFO would have influencedwhether the new company inclined towards a centralised structureto manage costs, which Publicis argues has driven its highermargins, or Omnicom's more devolved approach.
Neither company will pay a termination fee, and they willsplit the costs of the failed deal, such as legal fees.
With the deal off the cards, analysts predicted a period ofturmoil ahead for the industry as Publicis and Omnicom seek tore-engage with clients after recent business losses.
One global consultant who advises clients on media spendtold Reuters that agencies within Martin Sorrell's WPP,which will keep its crown as the world's largest advertisingagency, had won a lot of work of late by cutting fees.
He advised existing clients of Publicis and Omnicom to usethe uncertainty to negotiate better terms. He noted that someclient work coming up for review in the coming months would alsopitch agencies owned by the two firms against each other.
Publicis shares were down almost 1 percent, while Britain'sWPP was flat. Smaller French player Havas,seen as a takeover target, jumped 3.4 percent.
"We see the consequences for the agency space as negativeas, shorter-term, it is likely to lead to a more competitiveenvironment and, longer-term, it dashes the hopes that themerger would lead to an easing of pressures in staff costs andclient fees," wrote Liberum analyst Ian Whittaker.
Some analysts also said further deals could crop upinvolving perhaps fourth-largest agency Interpublic andJapanese advertising group Dentsu.
SOAP OPERA
Sorrell told Reuters the failure of the deal had turned intoa soap opera.
"You now have the charade of them trying to say we're justas well off apart as we were together, which begs the questionof why spend a couple of hundred million dollars to prove thatbeing together didn't work. It was ill thought through."
Although Levy still believes Publicis should be bigger tocope with the way technology is changing the ad business, hedemurred on whether the group needed a big acquisition.
"For now, our goal is simple - to accelerate our strategicplan," he said.
Publicis and Omnicom had justified the marriage as a way toprovide scale and capital to cope with technological forcesreshaping the industry.
Wren and Levy, who toasted the tie-up with champagne inParis last summer, had said it would enable them to bettercompete with the likes of Google Inc and Facebook Inc, which dominate digital advertising, an area thataccounts for nearly a quarter of global marketing spending.
The planned merger had called for a 50-50 ownership split ofthe equity in the new company, Publicis Omnicom Group, with Wrenand Levy serving as co-CEOs for 30 months from theclosing.
Signs of trouble between Omnicom and Publicis appeared inlate April when Wren disclosed hurdles to getting the deal's taxstructure approved by regulators in Europe. He ominously said hecould not predict when the deal would close and said there was"no Plan B" if the tax issues were not resolved.
Soon after, media outlets reported that the fight over theleadership of the future group had frayed relations between thetwo sides. One person on the French side said Omnicom appearedless willing to compromise in recent weeks than Publicis, whichwas trying to save the deal.
Levy had previously postponed retirement plans as successionat Publicis remained an open issue prior to the deal. Thosequestions are likely to come to the fore again.
Brian Wieser, a senior analyst at Pivotal Research, saidthat though the potential merger was handled badly, there wasstill pressure on ad agencies to strike deals as they weresqueezed by clients looking to cut costs.
"M&A and consolidation is still on the table, but now thereare more potential flavours," he said.
He said Publicis was still a more likely a buyer than aseller, and Interpublic a more likely seller.
"The question is not whether or not there will be bids, butat what price Interpublic would sell, especially considering itshould have a strong year on an operating basis." (Additional reporting by Jean-Michel Belot in Paris, Aman Shahin Bangalore, Jennifer Saba in New York, and Sophie Sassard andKate Holton in London. Writing by Leila Abboud and Kate Holton.;Editing by Eric Walsh, Richard Chang, Ken Wills and WillWaterman)
WPP (WPP)
