The Havas-Aegis Deal Worst-Case Scenario

(MoneyWatch)  Everyone is familiar with Havas boss Vincent Bollore's "long love affair" with Aegis. He holds about 30 percent of Aegis and has made five failed attempts to win two seats on the board of Aegis. The Aegis people don't want him on the board because -- obviously -- it's a conflict of interest.

Now, analysts say, with management turmoil at Aegis, Bollore and Havas are closer than ever to combining the two networks. It raises the question: What's the worst that could happen under such a scenario?

Let's look at the current situation first. Bollore is allegedly circling like a drooling hyena, taking his time while the credit crisis sets up the conditions for consolidation:

An industry source said Bollore was simply waiting and watching to see if the change in Aegis management results in a change in strategy.

Bollore himself offered this zen-like truism:

One has to be two to cooperate and for now we respect Aegis' decision to go it alone.

The logic of the putative deal, per Bollore, is that:

Together, Havas and Aegis represent about EUR1.5 billion revenue and 15,000 employees, which makes them two small actors compared to big groups like WPP.

Given that the spectre of WPP is already haunting these Europeans, what does wire-and-plastic-products maestro Martin Sorrell have to say about all this?

Vincent Bollore has time and money. He could snap up Aegis today if he decided to. It's most likely just a matter of time.

That doesn't sound like robust opposition to me. Could it be that Sorrell would actually enjoy seeing these two networks get together? A brief examination of Havas and Aegis's financials suggests that there is one obscure advantage for WPP in the wake of such a merger: The prospect that French management at Havas might ruin the productivity of the English management at Aegis. The evidence for this can be found if you look at each holding company's revenues and divide them by their total operating expenses. The result tells you how much each company earned back per pound or euro it spent to make those sales. The yield at Aegis is roughly 1.28, whereas at Havas it's an anemic 1.11. If the Havas management were to prevail and impose its systems upon Aegis, it would actually reduce the productivity of the British network.

Where is WPP in all of this? It's expense yield is 1.13 -- more than Havas and less than Aegis. Arguably, the Xmas gift that Sorrell would like best is if the French at Havas dragged down the level of efficiency at Aegis to below that of WPP.

This isn't wild speculation. As Reuters notes, Aegis is currently the stronger network of the pair:

Aegis has long been one of the strongest groups in the ad sector, with a good geographic spread, a strong digital strategy and organic revenue growth twice the industry average at 9.8 percent in 2007. Aegis trades at 7.7 percent estimated 2009 earnings against 7 times for Havas.

The main advantage for Aegis folk in this merger? Well, you might get to hang out with Nikolas Sarkozy and -- even better -- Carla Bruni (both pictured) on Bollore's yacht.