SEC Company Response from OMNICOM GROUP INC. (OMC) (CIK 0000029989) (OMC) — Jul 12, 2017
OMNICOM GROUP INC. (OMC) (CIK 0000029989)
Date: July 12, 2017 · CIK: 0000029989 · Accession: 0000029989-17-000013
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-10551
Referenced dates: April 28, 2017
Letter
Division of Corporation Finance Securities and Exchange Commission Re: Omnicom Group Inc. Form 10‑K for Fiscal Year Ended December 31, 2016 Filed February 9, 2017 File No. 001-10551
Dear Mr. Pacho:
This letter responds to the comment letter, dated June 12, 2017, of the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) relating to Omnicom Group Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. For your convenience, the comments in the letter are repeated below. All references to “Omnicom,” “we,” “us” and “our” refer to Omnicom Group Inc.
Pursuant to 17 C.F.R. §200.83, we request that confidential treatment under the Freedom of Information Act (“FOIA”) be afforded to the redacted portions of our response to Staff Comments 1, 3, and 5, and Attachments 1, 2, and 3. The confidential information is marked with bracketed asterisks (“[***]”). Omnicom believes that the confidential information contains proprietary business information that should not be disclosed to any person. If any person requests access to the confidential information referred to herein, whether pursuant to the FOIA or otherwise, we request in accordance with Rule 83 that we be promptly notified of any such request and furnished with a copy of all written materials pertaining to such request, so that we may further substantiate the foregoing request for confidential treatment. Please address any notifications of a request for access to such documents to the undersigned.
Background and Context
Omnicom is a strategic holding company providing professional services, including advertising, marketing and corporate communications services to clients through multiple agencies around the world. Omnicom’s business model was built and evolves around its clients. While our companies operate under different names and frame their ideas in different disciplines, we organize our services around clients. The fundamental premise of Omnicom’s business is that clients’ specific requirements should be the central focus in how we structure our service offerings and allocate our resources. This client-centric business model results in multiple agencies within Omnicom collaborating in formal and informal virtual client Networks that cut across internal organizational structures through our key client matrix organization to execute against our clients’ specific marketing requirements. We believe that this organizational philosophy and our ability to execute on it differentiate us from our competition.
We have approximately 1,200 agencies operating under 250 brands in over 100 countries and servicing more than 5,000 clients. To help manage the scale and scope of the organization, our agencies report into one of the five Networks primarily for the purpose of administration, human resource management and client management logistics, as well as for performance management and planning and control. As clients increase their demands for marketing
effectiveness and efficiency, they have made it a practice to consolidate their business within one holding company in the pursuit of a single engagement covering all consumer touch points. In this environment, the traditional responsibilities and capabilities of individual agencies and Networks break down, and managers are forced to develop new approaches and use cross-agency relationships often through client-centric, virtual client Networks that can deliver the integrated services clients increasingly expect.
The organizational flexibility inherent in our virtual client Networks is our strategic rationale for maintaining multiple distinct agencies in the marketplace, despite the similar nature of their businesses. Distinct agencies remove, in practice and in principle, perceptions of conflicts of interest when we are dealing with multiple product groups within the same client, allowing Omnicom as a whole to work with multiple competitive clients in each industry, in each discipline and in each geographic market. Were it not for this perception of conflicts, we would likely not be organized through our five Networks.
Creating the best solutions to serve our clients’ needs drives our decisions regarding the creation of our virtual Networks and client teams. Our chief operating decision makers (“CODM”), collectively our CEO and CFO, make all meaningful investment and resource decisions in this context. We do not limit ourselves to the organizational boundaries of our five Network structure. Longer-term, we believe that Omnicom’s virtual Network strategy facilitates better client management and allows for better integration of the services required by the world’s largest brands. Our over-arching strategy for the business is to continue to use these virtual client client Networks to grow our business relationships with our largest clients by serving them across our Networks, disciplines and geographies. The client service models that enable our virtual client Network strategy are summarized in the visual aide included as Attachment 1.
7. Segment Reporting, page F-17
1. We note you identify your Networks by name on your website. Please provide us the names of each of the five numbered Networks in your response and their respective geographic jurisdictions / organizations as applicable.
RESPONSE
The names of each Network, as they correspond to the Network referred to in our letter to the Staff dated April 28, 2017 (the “Response Letter”) are as follows:
•Network 1 - [***]
•Network 2 - [***]
•Network 3 - [***]
•Network 4 - [***]
•Network 5 - [***]
Geographic Organizational Approach
Our Networks operate in all major global markets and through their branded agencies provide a comprehensive range of advertising, marketing and corporate communications services. Although some of our Networks also bear the same name of their globally recognized communications agency brand, the Networks are not comprised exclusively of agencies that operate within that branded group of companies. Each Network has a regional reporting unit responsible for the agencies in that region. The Network regional reporting unit has a manager that is responsible for the operations and administration of the agencies in the regional unit. Our Networks operate and manage their business in three principal geographic regions: the Americas, EMEA and Asia-Pacific. Omnicom also has resources in each of these regions to help coordinate shared functions. Within the major markets of each region, the Networks have resources to service their major global clients where most of each Network's revenue is earned. The geographic diversity of the Networks is an outcome of client service needs. As discussed further in comment 3a below, investments to develop a Network’s service capability are evaluated from the totality of Omnicom’s existing capabilities. As a result, the geographic footprint of any one of our Networks is not a strategic imperative. The Omnicom CODM evaluates the need to invest in a specific country or region after careful consideration of the depth of our capabilities across all Networks.
The following is a summary of revenue by geography:
Network
Americas:
North America
[***]
[***]
[***]
[***]
[***]
Latin America
[***]
[***]
[***]
[***]
[***]
EMEA:
Europe
[***]
[***]
[***]
[***]
[***]
Middle East and Africa
[***]
[***]
[***]
[***]
[***]
Asia Pacific
[***]
[***]
[***]
[***]
[***]
2. Given that each Network (or major agency within each Network) appears to have its respective brand distinction and primary discipline, tell us how this differentiation and respective offering matter to a client in its Network (agency) selection decision.
RESPONSE
Our agencies sell their intellectual capital and use their brand and culture to distinguish themselves from competitors, including their affiliated companies. Most potential client opportunities require the ability to deliver a broad range of capabilities and a demonstrated ability to collaborate effectively across service disciplines as part of an integrated team, comprised of both internal and external groups. In this context, our Networks and agencies compete both against each other and with each other on a regular basis in the marketplace. Certain client briefs may be narrow in their scope, and focus specifically on a project or capability for which they have a need. To start, certain agencies will not be considered by the client because of the perception of a conflict of interest if a Network or agency performs similar services for a direct competitor. Our agencies with the specific capabilities requested would participate in the pitch and the potential clients would base their decision on their assessment of how well the agency meets their requirements. In most of these cases, the client's decision is based on its assessment of the people that will perform the work and the agency’s prior success working on similar projects. For example, clients may require assistance with developing a name for a new product, or they may have a need for in-store messaging and media services. In these cases, agencies with the specific expertise would likely participate in the pitch, which may result in the participation of one of our branding specialist agencies, and shopper marketing agencies, respectively. However, more often than not, these projects are not undertaken in a vacuum and the proven ability to collaborate with other service providers used by that client is a requirement of the brief.
Looking forward, because of the rapidly changing technology and media landscape, clients continue to demand integrated solutions to their advertising and marketing needs and we expect the lines between the disciplines, from traditional media advertising campaigns, public relations programs and customer relationship marketing, to continue to blur. The goal of our Networks and agencies is to understand the client’s marketing strategy, collaborate to develop the content across the disciplines in the most effective way, and deliver a seamless integrated consistent message that is adaptable to the vast array of traditional and new media channels. We believe the investments we have made, and continue to make, to develop our virtual client Networks and our key client matrix organization has us well-positioned for the future state of advertising, marketing and corporate communications.
3. We note in your response to comment 4 that Networks 1 and 2 were legacy from formation while Networks 3, 4 and 5 evolved over time. In this regard, please tell us:
3a. How agencies get assigned to a particular Network.
RESPONSE
The assignment of an agency to a particular Network typically results from our legacy structure, an internal decision to re-align an agency within our Network structure to better support our virtual client Network strategy or, in some cases, an acquisition initiated by a Network. However, the re-alignment of agencies can and does result from a variety of other factors. An agency may be re-aligned: (a) in an effort to avoid conflicts of interest when we are dealing with clients within the same industry, (b) when the client has moved from one Network to another Network, or (c) where a management change occurs and a key manager is moved from one Network to another and the agency or
agencies under the responsibility of that manager will follow the manger to the new Network. In these cases, we are indifferent to which Network the agency is aligned, as long as we are providing the solution that best meets our clients’ needs.
As discussed in the Response Letter, the primary strategic focus of Omnicom's CODM is our virtual client Networks. Under this approach strategic decisions are made from a client perspective and the resulting impact to the Networks is evaluated as an outcome rather than an objective. One way to describe the interrelationship of our Networks in our virtual client Networks is by using an analogy to a portfolio of investments. In this comparison, the clients are the investors, the Networks and agencies are the investments and the Omnicom CODM is the investment manager. Like any sound investment manager, the CODM strives to seek out the best investments, manage concentrations and align the investments with investor (client’s) objectives. All the strategic and tactical considerations of the CODM that directly impact the Networks, from resource allocations that involve investments in people and systems, to the acquisition of businesses and new clients, are made from the perspective of the totality of Omnicom’s portfolio of businesses and not any one Network. Also, in this regard, from the perspective of the virtual client Network strategy, all the service capabilities do not necessarily have to exist inside each Network. As a result, we do not consider the depth of the service capability by discipline to be an important strategic factor for our Networks to be able to compete effectively in the marketplace. In fact, as discussed in greater detail below, we are in the process of culling out from each Network certain disciplines and combining them to form practice areas that we expect will enable the agencies to collaborate across our virtual client Networks even more efficiently and effectively.
3b. How much advertising revenue is earned by Networks 1, 2, 3 and 5.
3c. How much revenue from CRM, PR and Specialty services are earned by each Network.
RESPONSE
By way of background, in prior years we described our advertising services discipline as “Traditional Media Advertising,” which included professional services to both create advertising ideas and content, as well as to plan and execute their delivery through various media channels. In response to the many changes that have occurred to the media landscape (including the proliferation of digital media channels and platforms, such as Google, Facebook and Netflix, and “over-the-top offerings,” among others, as well as the ubiquity of mobile devices) over the past five-plus years, we concluded that the term “Traditional” no longer fit with the services we currently provide and, as a result, we shortened the name of our services discipline to “Advertising.”
Network
Advertising
[***]
[***]
[***]
[***]
[***]
CRM
[***]
[***]
[***]
[***]
[***]
Public Relations
[***]
[***]
[***]
[***]
[***]
Specialty Communications
[***]
[***]
[***]
[***]
[***]
[***]
Customer Relationship Management (CRM) services enable clients to manage, analyze, improve, facilitate or support customer interactions through various channels, including, among others: direct marketing, social media, e-commerce, mobile marketing, and field and channel marketing.
Public Relations services include: brand marketing, corporate communications, crisis management, public affairs, media and media relations services, and content marketing.
Specialty Communications include advertising and media services to global healthcare clients, as well as other agencies that provide industry specific knowledge.
3d. Under what circumstances, how often, and to what extent has your CODM moved a client relationship from one Network to another, or to another agency within a Network. Explain to us how this impacts your reporting.
RESPONSE
Managing client relationships is at the heart of the virtual client Network strategy. Given our vast client base, it is no overstatement to describe client service considerations as a daily event. As a result,
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CORRESP 1 filename1.htm Document CONFIDENTIAL TREATMENT REQUESTED BY OMNICOM GROUP INC. Omnicom Group Inc. 437 Madison Avenue New York, NY 10022 Attn: Mr. Philip J. Angelastro, Executive Vice President and Chief Financial Officer (212) 415-3098 July 12, 2017 Mr. Carlos Pacho Division of Corporation Finance Securities and Exchange Commission 100 F Street, NE Washington, D.C. 20549 Re: Omnicom Group Inc. Form 10‑K for Fiscal Year Ended December 31, 2016 Filed February 9, 2017 File No. 001-10551 Dear Mr. Pacho: This letter responds to the comment letter, dated June 12, 2017, of the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) relating to Omnicom Group Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. For your convenience, the comments in the letter are repeated below. All references to “Omnicom,” “we,” “us” and “our” refer to Omnicom Group Inc. Pursuant to 17 C.F.R. §200.83, we request that confidential treatment under the Freedom of Information Act (“FOIA”) be afforded to the redacted portions of our response to Staff Comments 1, 3, and 5, and Attachments 1, 2, and 3. The confidential information is marked with bracketed asterisks (“[***]”). Omnicom believes that the confidential information contains proprietary business information that should not be disclosed to any person. If any person requests access to the confidential information referred to herein, whether pursuant to the FOIA or otherwise, we request in accordance with Rule 83 that we be promptly notified of any such request and furnished with a copy of all written materials pertaining to such request, so that we may further substantiate the foregoing request for confidential treatment. Please address any notifications of a request for access to such documents to the undersigned. Background and Context Omnicom is a strategic holding company providing professional services, including advertising, marketing and corporate communications services to clients through multiple agencies around the world. Omnicom’s business model was built and evolves around its clients. While our companies operate under different names and frame their ideas in different disciplines, we organize our services around clients. The fundamental premise of Omnicom’s business is that clients’ specific requirements should be the central focus in how we structure our service offerings and allocate our resources. This client-centric business model results in multiple agencies within Omnicom collaborating in formal and informal virtual client Networks that cut across internal organizational structures through our key client matrix organization to execute against our clients’ specific marketing requirements. We believe that this organizational philosophy and our ability to execute on it differentiate us from our competition. We have approximately 1,200 agencies operating under 250 brands in over 100 countries and servicing more than 5,000 clients. To help manage the scale and scope of the organization, our agencies report into one of the five Networks primarily for the purpose of administration, human resource management and client management logistics, as well as for performance management and planning and control. As clients increase their demands for marketing effectiveness and efficiency, they have made it a practice to consolidate their business within one holding company in the pursuit of a single engagement covering all consumer touch points. In this environment, the traditional responsibilities and capabilities of individual agencies and Networks break down, and managers are forced to develop new approaches and use cross-agency relationships often through client-centric, virtual client Networks that can deliver the integrated services clients increasingly expect. The organizational flexibility inherent in our virtual client Networks is our strategic rationale for maintaining multiple distinct agencies in the marketplace, despite the similar nature of their businesses. Distinct agencies remove, in practice and in principle, perceptions of conflicts of interest when we are dealing with multiple product groups within the same client, allowing Omnicom as a whole to work with multiple competitive clients in each industry, in each discipline and in each geographic market. Were it not for this perception of conflicts, we would likely not be organized through our five Networks. Creating the best solutions to serve our clients’ needs drives our decisions regarding the creation of our virtual Networks and client teams. Our chief operating decision makers (“CODM”), collectively our CEO and CFO, make all meaningful investment and resource decisions in this context. We do not limit ourselves to the organizational boundaries of our five Network structure. Longer-term, we believe that Omnicom’s virtual Network strategy facilitates better client management and allows for better integration of the services required by the world’s largest brands. Our over-arching strategy for the business is to continue to use these virtual client client Networks to grow our business relationships with our largest clients by serving them across our Networks, disciplines and geographies. The client service models that enable our virtual client Network strategy are summarized in the visual aide included as Attachment 1. 7. Segment Reporting, page F-17 1. We note you identify your Networks by name on your website. Please provide us the names of each of the five numbered Networks in your response and their respective geographic jurisdictions / organizations as applicable. RESPONSE The names of each Network, as they correspond to the Network referred to in our letter to the Staff dated April 28, 2017 (the “Response Letter”) are as follows: •Network 1 - [***] •Network 2 - [***] •Network 3 - [***] •Network 4 - [***] •Network 5 - [***] Geographic Organizational Approach Our Networks operate in all major global markets and through their branded agencies provide a comprehensive range of advertising, marketing and corporate communications services. Although some of our Networks also bear the same name of their globally recognized communications agency brand, the Networks are not comprised exclusively of agencies that operate within that branded group of companies. Each Network has a regional reporting unit responsible for the agencies in that region. The Network regional reporting unit has a manager that is responsible for the operations and administration of the agencies in the regional unit. Our Networks operate and manage their business in three principal geographic regions: the Americas, EMEA and Asia-Pacific. Omnicom also has resources in each of these regions to help coordinate shared functions. Within the major markets of each region, the Networks have resources to service their major global clients where most of each Network's revenue is earned. The geographic diversity of the Networks is an outcome of client service needs. As discussed further in comment 3a below, investments to develop a Network’s service capability are evaluated from the totality of Omnicom’s existing capabilities. As a result, the geographic footprint of any one of our Networks is not a strategic imperative. The Omnicom CODM evaluates the need to invest in a specific country or region after careful consideration of the depth of our capabilities across all Networks. The following is a summary of revenue by geography: Network 1 2 3 4 5 Americas: North America [***] [***] [***] [***] [***] Latin America [***] [***] [***] [***] [***] EMEA: Europe [***] [***] [***] [***] [***] Middle East and Africa [***] [***] [***] [***] [***] Asia Pacific [***] [***] [***] [***] [***] 2. Given that each Network (or major agency within each Network) appears to have its respective brand distinction and primary discipline, tell us how this differentiation and respective offering matter to a client in its Network (agency) selection decision. RESPONSE Our agencies sell their intellectual capital and use their brand and culture to distinguish themselves from competitors, including their affiliated companies. Most potential client opportunities require the ability to deliver a broad range of capabilities and a demonstrated ability to collaborate effectively across service disciplines as part of an integrated team, comprised of both internal and external groups. In this context, our Networks and agencies compete both against each other and with each other on a regular basis in the marketplace. Certain client briefs may be narrow in their scope, and focus specifically on a project or capability for which they have a need. To start, certain agencies will not be considered by the client because of the perception of a conflict of interest if a Network or agency performs similar services for a direct competitor. Our agencies with the specific capabilities requested would participate in the pitch and the potential clients would base their decision on their assessment of how well the agency meets their requirements. In most of these cases, the client's decision is based on its assessment of the people that will perform the work and the agency’s prior success working on similar projects. For example, clients may require assistance with developing a name for a new product, or they may have a need for in-store messaging and media services. In these cases, agencies with the specific expertise would likely participate in the pitch, which may result in the participation of one of our branding specialist agencies, and shopper marketing agencies, respectively. However, more often than not, these projects are not undertaken in a vacuum and the proven ability to collaborate with other service providers used by that client is a requirement of the brief. Looking forward, because of the rapidly changing technology and media landscape, clients continue to demand integrated solutions to their advertising and marketing needs and we expect the lines between the disciplines, from traditional media advertising campaigns, public relations programs and customer relationship marketing, to continue to blur. The goal of our Networks and agencies is to understand the client’s marketing strategy, collaborate to develop the content across the disciplines in the most effective way, and deliver a seamless integrated consistent message that is adaptable to the vast array of traditional and new media channels. We believe the investments we have made, and continue to make, to develop our virtual client Networks and our key client matrix organization has us well-positioned for the future state of advertising, marketing and corporate communications. 3. We note in your response to comment 4 that Networks 1 and 2 were legacy from formation while Networks 3, 4 and 5 evolved over time. In this regard, please tell us: 3a. How agencies get assigned to a particular Network. RESPONSE The assignment of an agency to a particular Network typically results from our legacy structure, an internal decision to re-align an agency within our Network structure to better support our virtual client Network strategy or, in some cases, an acquisition initiated by a Network. However, the re-alignment of agencies can and does result from a variety of other factors. An agency may be re-aligned: (a) in an effort to avoid conflicts of interest when we are dealing with clients within the same industry, (b) when the client has moved from one Network to another Network, or (c) where a management change occurs and a key manager is moved from one Network to another and the agency or agencies under the responsibility of that manager will follow the manger to the new Network. In these cases, we are indifferent to which Network the agency is aligned, as long as we are providing the solution that best meets our clients’ needs. As discussed in the Response Letter, the primary strategic focus of Omnicom's CODM is our virtual client Networks. Under this approach strategic decisions are made from a client perspective and the resulting impact to the Networks is evaluated as an outcome rather than an objective. One way to describe the interrelationship of our Networks in our virtual client Networks is by using an analogy to a portfolio of investments. In this comparison, the clients are the investors, the Networks and agencies are the investments and the Omnicom CODM is the investment manager. Like any sound investment manager, the CODM strives to seek out the best investments, manage concentrations and align the investments with investor (client’s) objectives. All the strategic and tactical considerations of the CODM that directly impact the Networks, from resource allocations that involve investments in people and systems, to the acquisition of businesses and new clients, are made from the perspective of the totality of Omnicom’s portfolio of businesses and not any one Network. Also, in this regard, from the perspective of the virtual client Network strategy, all the service capabilities do not necessarily have to exist inside each Network. As a result, we do not consider the depth of the service capability by discipline to be an important strategic factor for our Networks to be able to compete effectively in the marketplace. In fact, as discussed in greater detail below, we are in the process of culling out from each Network certain disciplines and combining them to form practice areas that we expect will enable the agencies to collaborate across our virtual client Networks even more efficiently and effectively. 3b. How much advertising revenue is earned by Networks 1, 2, 3 and 5. 3c. How much revenue from CRM, PR and Specialty services are earned by each Network. RESPONSE By way of background, in prior years we described our advertising services discipline as “Traditional Media Advertising,” which included professional services to both create advertising ideas and content, as well as to plan and execute their delivery through various media channels. In response to the many changes that have occurred to the media landscape (including the proliferation of digital media channels and platforms, such as Google, Facebook and Netflix, and “over-the-top offerings,” among others, as well as the ubiquity of mobile devices) over the past five-plus years, we concluded that the term “Traditional” no longer fit with the services we currently provide and, as a result, we shortened the name of our services discipline to “Advertising.” Network 1 2 3 4 5 Advertising [***] [***] [***] [***] [***] CRM [***] [***] [***] [***] [***] Public Relations [***] [***] [***] [***] [***] Specialty Communications [***] [***] [***] [***] [***] [***] Customer Relationship Management (CRM) services enable clients to manage, analyze, improve, facilitate or support customer interactions through various channels, including, among others: direct marketing, social media, e-commerce, mobile marketing, and field and channel marketing. Public Relations services include: brand marketing, corporate communications, crisis management, public affairs, media and media relations services, and content marketing. Specialty Communications include advertising and media services to global healthcare clients, as well as other agencies that provide industry specific knowledge. 3d. Under what circumstances, how often, and to what extent has your CODM moved a client relationship from one Network to another, or to another agency within a Network. Explain to us how this impacts your reporting. RESPONSE Managing client relationships is at the heart of the virtual client Network strategy. Given our vast client base, it is no overstatement to describe client service considerations as a daily event. As a result,