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Deal adds strength but some business may exit: Analysts

Deal adds strength but some business may exit: Analysts

Aon PLC’s proposed acquisition of Willis Towers Watson PLC will create a huge brokerage but other rivals will likely pick up personnel and business from the firms as the purchase is digested, observers say.

The deal, however, could lead to stronger results for the combined entity over the long term, analysts said.

“You’ll see some dislocation,” said Timothy Cunningham, principal at Optis Partners LLC in Chicago. Other brokers will have the “opportunity to capture business and an opportunity for talent,” in the wake of the deal, he said.

While smaller brokers will likely take niche business from the combined brokerage, “it’s not as though these smaller companies will take massive amounts of business,” said  Meyer Shields, managing director at Keefe, Bruyette & Woods Inc. in Baltimore.

Commercial customers may also leave the combined entity, he said.

“There will be clients which have business with both Aon and Willis,” and if they become one, “some buyers will be unhappy with that,” Mr. Shields said.

Although there may be some loss of revenue in the near term, over the long term the deal could produce better results for the Willis Towers Watson side of the business, he said.

“Aon’s management team has a phenomenal track record that they’re likely to exercise to drive better results on the legacy Willis business,” Mr. Shields said.

In a note on the deal, Standard & Poor’s Financial Services LLC said the combination would be positive.

“This combination modestly improves our assessment of the strength of the combined entity’s business, creating a more complete insurance broker in the large account and middle-market space,” the note said.

The deal “has the potential to strengthen Aon’s business profile by adding a robust middle market presence, which they currently lack, and that’s where Willis has a real strength,” said S&P senior credit analyst Joseph N Marinucci, in an interview.

The deal would also add product depth and operational capabilities and “there’s clearly going to be scale benefits,” from a credit perspective, he said, however, there will be integration risks associated with such a “large, transformational” transaction, he added.

The deal did not come as a surprise to many observers after the firms tipped their hand with a brief encounter last March.  

“It’s not shocking,” said Paul Newsome, managing director in Chicago at investment brokerage Piper Sandler Cos.

“Willis had indicated they were willing to talk last year,” and with no clear heir apparent to CEO John Haley, who is due to retire at year-end, “from the outside” it looks like Willis Towers Watson would have been a “willing seller,” Mr. Newsome said. 

The cost cuts Aon is projecting -- $800 million pre-tax after three years – are possible “given the scale of the company they’re putting together,” Mr. Newsome said.

Investors, however, may have concerns over whether Aon is forced to divest operations to secure regulatory approval of the deal, he said.

Also, the deal may slow organic growth, Mr. Newsome said. “I think there is a concern that the organic growth of the company could slow, because we saw slowing organic growth when Marsh bought JLT.”

Aon’s investor presentation on the deal showed accelerated organic growth of 4% in 2017, 5% in 2018, and 6% in 2019. The presentation also stated an “ongoing commitment to long-term financial goals of mid-single-digit or greater organic revenue growth.”

On a conference call with analysts to announce the deal, Aon CEO Greg Case said that “clients are facing greater challenges than ever before,” and despite progress in meeting these challenges, “we are not moving fast enough.”

There is “significant opportunity to accelerate together,” with Willis Towers Watson, he said.