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Aon-Willis deal falls apart, leaves questions over brokers’ prospects

Posted On: Jul. 26, 2021 2:40 PM CST


In the face of antitrust concerns, Aon PLC announced Monday it would terminate its agreement to buy rival Willis Towers Watson PLC, raising questions over which companies will benefit or suffer in the wake of the failed deal.

Aon will pay a $1 billion break-up fee and lose the opportunity to leapfrog Marsh & McLennan Cos. Inc. and become the world’s largest broker but will likely quickly revert to its previous strategy of aggressively managing expenses and growing its business, analysts say.

Willis, which has lost a steady stream of staff since the $30 billion deal was announced last March, will likely use some of the break-up fee to try and rebuild its business, but it also faces questions over its long-term leadership, they say.

Arthur J. Gallagher & Co., which had agreed to purchase significant slices of Willis’ business to allay antitrust concerns raised by European regulators, contingent on the Aon-Willis deal being completed, will lose a good opportunity to significantly expand its business on favorable terms but will likely keep on with its “tuck-in” acquisitions of smaller rivals, they say.

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Meanwhile, Marsh McLennan says it has recruited numerous Aon and Willis staff over the past 15 months.

The decision to end the deal came a month after the U.S. Department of Justice sued to block the deal, saying the merger would reduce competition in several areas, including large-account business. A trial over the suit was scheduled to begin in November.

In a video to Aon staff released Monday, CEO Greg Case said the case would have stretched into 2022.

“The demands made by the U.S. Department of Justice would have stifled innovation and destroyed our client-serving capability,” Mr. Case said. “At best, the DOJ’s perspective represents a fundamental misunderstanding of the marketplace; at worst, our combination was blocked by poor timing and other factors outside our control.”

In a statement, U.S. Attorney General Merrick B. Garland said the termination of the deal would help maintain competition in the brokerage sector.

“American employees and retirees rely on dependable health care and retirement plans provided by their employers,” he said. “Many of those employers, in turn, rely on insurance brokers like Aon and Willis Towers Watson for managing the complexities of these health and retirement benefits.

“Businesses also rely on Aon and Willis Towers Watson to compete for the bulk of their risk management portfolio, including property and casualty insurance. The decision to abandon this anti-competitive merger will help preserve competition in insurance brokering.”

Other regulators, including the European Commission, had approved the deal after Aon and Willis agreed to sell portions of their businesses to Gallagher and others.

Prior to the Aon-Willis deal, antitrust regulators showed little interest in the insurance brokerage sector, so going forward there may be some “incremental scrutiny” of insurance-related mergers, said J. Paul Newsome Jr., Chicago-based managing director of equity research at Piper Sandler & Co. However, most brokerage deals are small and should not raise antitrust concerns, he said.

It remains unclear why Aon decided that terminating the deal was a better route than settling with the DOJ, said Meyer Shields, Baltimore-based managing director at Keefe, Bruyette & Woods Inc.

“I don’t know how paying out $1 billion in the long term maximizes value to Aon, and I’m very surprised,” he said.

Aon’s senior management team has historically been very successful at managing expenses and the Willis deal offered a significant opportunity to add small and medium-sized commercial accounts, separate from the large-account business Aon-Willis may have had to sell to secure DOJ approval of the deal, Mr. Shields said.

Willis already had significant funds on its balance sheet available for share buybacks, so the break-up fee may be used for other purposes.

“Rebuilding the ranks is not cheap and will require a lot of capital,” he said.

In its second-quarter earnings call with analysts last week, Marsh McLennan indicated it had sharply increased the number of people it hired from Aon and Willis since the merger was announced.

In a deal-break scenario Willis will likely use the $1 billion proceeds from Aon, along with cash on hand, to initiate a restructuring/retention plan and share repurchases of up to $2 billion, C. Gregory Peters, managing director, equity research, at St. Petersburg, Florida-based Raymond James & Associates said in a June 22 note.

In a statement Monday, Willis said it has already added $1 billion to its share buyback program, which had $500 million remaining, following the announcement of the deal’s termination. The brokerage said it would host an investor day on Sept. 9.

Willis also expects to use the significant capital generated by cash flow from operating and non-operating activities to, “among other things, increase its investment in organic and inorganic growth opportunities over the next three years,” the broker said.

The biggest question for Willis is its plan for CEO succession as John Haley was expected to retire when the deal with Aon closed, Elyse Greenspan, managing director, equity research, insurance, at Wells Fargo Securities LLC in New York, said in a note Monday. Willis is due to report second-quarter earnings on Aug. 3.

Willis in June 2020 amended Mr. Haley’s contract to keep him with the company until the effective date of its business combination with Aon. However, if the effective date did not occur prior to Dec. 31, 2021, Mr. Haley’s term would expire, according to a June 10, 2020, Securities and Exchange Commission filing.

Julie Gebauer, head of human capital and benefits at Willis, was widely regarded as the most likely successor to Mr. Haley prior to the proposed deal with Aon. Ms. Gebauer had been named as CEO of health, wealth and career and head of strategy on the operations side in the combined Aon-Willis.

Aon announced Monday that it has extended its employment agreements with Mr. Case and Chief Financial Officer Christa Davies for an additional three years until April 2026.

Gallagher had prefunded its proposed purchase of a significant portion of Willis Re and other Willis assets but indicated that it would use the funds to buy back shares if the deal did not go through.

Gallagher, which has a long history of buying smaller rivals, misses out on an opportunity to significantly expand its business with the termination of the Aon-Willis deal but will likely continue to grow through smaller acquisitions, said Mr. Shields of KBW.

In late trading Monday, Aon’s share price was up about 8%, while Willis’ was down about 9%, and Gallagher was down about 2%.