Cheap new cash = property boom. Nothing has changed in 2,000 years!

He “made money so plentiful, that interest fell and the price of land rose considerably, And afterwards, as often as large sums of money came into his possession by means of confiscations, he would lend it free of interest, for a fixed term, to such as could give security for the double of what was borrowed.”

One may be forgiven for thinking the writer is referring to the current monetary policies being pursued across the globe. The author however was Suetonius and he was referring to Augustus over two thousand years ago. The similarities of course is that if you pump new cash into an economy and lend it at virtually no cost, it will inevitably be invested in other asset classes and drive up prices. It was blindingly obvious two millennia ago as it should be today.

There are however a number of worrying differences. Fractional banking and fiat currencies hadn’t yet been developed and the Romans at that stage didn’t need to resort to debasement, at least of their currency. After 31 BC, Augustus (albeit still just Octavian [sic] then) was busy plundering Egypt’s treasures and shipping it back to Rome and it was this that was being lent out to his cronies to make a fast aureus in property or buy their way into the senate – well okay, that part hasn’t changed much!  The main difference however is that the Roman property boom at the end of the first century BC was based on the injection of real treasure into the economy.  This time, new credit is being created to service previous credit as a means of keeping the previous bubble inflated while they try and ship the worst of their bad debts off their books and for Government’s to pretend that their budget deficits are not facing a demographic time-bomb. So will this new credit that is being so liberally extended across virtually every major trading zone ever get repaid? At least Octavian’s insistence of a 50% equity cushion meant that he at least stood a good chance of getting repaid.

What, no PubicOm?

Shock, horror. "Publicis and Omnicom agree to terminate proposed merger of equals"

10 months ago when Publicis and Omnicom announced their intention to merge I wrote two articles on this blog. The first was titled 'Omnicom & Publicis - a marriage not made in heaven' and was an initial response to the press leaks of the merger and it queried the limited business logic of the proposed combination (modest or revenue cost synergies and a risk of substantial revenue leakage), the incompatible acquisition strategies as well as the "inevitable cultural clash".  This was followed up the next day as the companies confirmed much of the details with another article 'Publicis Omnicom Groupe - financials less exciting than the impending management soap opera'. In it, I re-iterated my previous sentiments, in particular in response to the suggested dual management structure, to be managed out of both New York and Paris, but with a head office in the Netherlands. Referring to the similarly misconceived strategy initially created to facilitate the merger of Reed International and Elsevier a decade earlier, which ended disaster and had to be dropped, I wrote "something that will inevitably happen here if adopted unless it is to become a mongrel".

So, 10 months later after increasing reports of squabbles between the parties on the share out of the top jobs, we get the obliquely worded statement that it is all off and by mutual consent. For two supposedly savvy titans in the marketing services industry with their cohorts of advisors one might well ask how this train wreck was permitted to proceed for so long without having first confronted such basic management and strategic issues first; particularly when the industrial logic was already looking fairly tenuous to begin with. Also, did anyone not notice a certain sang froid between the "Freedom fries" and the "Cheese eating surrender monkeys" including Coca-Cola's failed approach for Danone and more recently GE's approach for Alstom?

What now? Both companies and advisors will now go into damage limitation mode and spin away that they will do almost as well apart as they would have been together. A number of issues however will need to be addressed.  1) Management succession, particularly at Publicis to replace the soon to be retiring CEO, Maurice Levy.  2) Digital services, particularly for Omnicom which has avoided being sucked into the digital buying boom, but now without Publicis's portfolio of recently acquired digital assets to leverage from it may need to re-think its acquisition strategy in this respect. On a more general level however, the financial markets will try and gauge a further two points. First, how much of the proposed cost synergies (c. +200bps to margins) from the proposed merger that were already being anticipated by the merger should now be backed out (ie how much of the 10-15% merger premium on the shares ought to removed), or will the respective management try and compensate by enacting tighter cost measure independently. Secondly, to what extent does this merger failure raise or lower the expectations for other corporate consolidations in the market? Will it drive Publicis into the arms of IPG or has the experience put it off the whole dating game for the moment. While no doubt there will be plenty of market punters touting the IPG story again, my personal take is that this will take some of the speculative heat out of the sector for the time being.