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Willis, Towers Watson merger expands benefits reach

Willis, Towers Watson merger expands benefits reach

Willis Group Holdings P.L.C. and Towers Watson & Co.'s proposed $18 billion merger of equals announced Tuesday will benefit both companies, the management of both broker consultants said.

Under the all-stock transaction, shareholders of London-based brokerage Willis will own about 50.1% of the combined company, while shareholders of New York-based risk management and human resources consultant Towers Watson will hold about 49.9% of the combined company.



The deal includes Towers Watson shareholders receiving 2.649 Willis shares for every Towers Watson share. In addition, Towers Watson shareholders would receive a “one-time cash dividend of $4.87 per Towers Watson share preclosing,” the companies said in a statement.

Both companies' boards have agreed on the merger, and the combined company will be Willis Towers Watson, the companies said.

The combined company will have about 39,000 employees in 120 countries and pro forma revenue of about $8.2 billion 2014, the companies said in the statement.

The deal is expected to result in cost savings of about $100 million to $125 million within three years of the deal closing, which Willis and Towers Watson said is expected Dec. 31.

James McCann, Willis' nonexecutive chairman, will become chairman of the combined company; John Haley, currently chairman and CEO of Towers Watson, will become CEO; and Dominic Casserley, CEO of Willis, will become president and deputy CEO.

“The rationale for the merger is powerful. At one stroke, the combination fast tracks each company's growth strategy and offers a truly compelling value proposition to our clients,” Mr. Casserley said in the statement.

Midmarket focus

“We look forward to bringing Towers Watson's innovative solutions to our clients alongside our broking and advisory services. The opportunity to deliver significant savings to our growing middle-market client base with Towers Watson's market-leading private exchange platform is particularly attractive,” Mr. Casserley said.

There are “numerous ways” the merger will help Towers Watson's business to grow, Mr. Haley said during a Tuesday conference call.

“We are very excited about Willis' distribution, which will enable us to enhance our middle-market exchange” capabilities, Mr. Haley said.

He said Towers Watson expects significant growth in this segment over the next five to seven years and believes that the merger would allow Towers Watson to achieve its ambition of a 25% market share of that business.

“Willis brokers can definitely accelerate sales via the exchange” with the merger, Mr. Casserley said during the call.

Willis and Towers Watson already had a relationship around the exchange platform and conversations “broadened from that relationship,” Mr. Casserley said.

“We are determined to develop an integrated company without any divisions or silos,” Mr. Casserley said.

Competitive landscape

Discussions about the merger began in April, Mr. Haley said.

He said Towers Watson divested its reinsurance brokerage business to Jardine Lloyd Thompson Group P.L.C. in 2013 because it “understood that if we were going to be in that space, it needed to be in a really serious way in order to compete” with global reinsurance brokerages, including Willis, and Towers Watson did not have the scale so to do.

“We are delighted by this merger because it re-establishes synergies with someone who is very strong in the reinsurance (brokerage) business,” Mr. Haley said.

While the companies offer many of the same services in their benefits business, there is little geographical overlap, he said.

Towers Watson Chief Financial Officer Roger Millay, who will become CFO of the combined company, said the deal was not driven by the tax advantages that being domiciled in Ireland will create, but did say that those savings will be a “nice consequence” of the transaction.

The combined company will have an “effective tax rate in the mid-20% range,” the companies said in an investor presentation.

Expectations high

Market analysts gave a general thumbs up to the proposed merger of Willis Group Holdings P.L.C. and Towers Watson & Co. announced Tuesday.

“The transaction appears to be almost a true merger of equals,” said J. Paul Newsome, managing director at Sandler O'Neill & Partners L.P. in Chicago in a research note.

“From our perspective, the strategic justification appears to be about the benefits of being a global insurance broker,” he wrote. “Both companies were already among the largest brokers in the world but not as global” as Aon P.L.C. and Marsh L.L.C.

“At first blush, the combined entity appears to offer impressive services for their corporate clients, which we expect to lead to stronger client retention rates and potentially higher growth rates,” said Cliff Gallant, an analyst with Nomura Securities International Inc. in San Francisco in a research note.

Mr. Gallant noted that “in professional service organizations, the employees are the main asset. Thus, we expect competitors will attempt to hire away key employees and have some degree of success. However, the relatively little overlap between the two organizations may limit departures.”

Mr. Newsome said in an email the new combination could create new competition for Arthur J. Gallagher & Co. and other major brokers.

“If Willis emerges as a better run company, (then) maybe the main impact for Gallagher and others is that there is just one more good competitor,” said Mr. Newsome in an email. “I am constantly reminding investors that the insurance broking business is a really big global market, and that just because there are two, three or four really big global insurance brokers doesn't mean that there isn't plenty of room for a fifth or sixth global giant. This is particularly true if you allow the insurance brokers smaller than Aon and Marsh to focus on the middle sized corporations.”

“The deal provides several well-respected consulting business segments, including a premier health insurance exchange, employee benefits brokerage, risk and financial services consulting, and talent and rewards consulting,” that largely mirror Aon's and Marsh's corporate structure,” said Meyer Shields, managing director at Keefe Bruyette & Woods Inc. in Baltimore in a research note. The merger also “implies significant cross-sell opportunities,” by giving Willis access to Towers Watson's domestic large corporate clients and Towers Watson access to Willis' middle-market clients across the globe, said Mr. Shields.

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