By Niclas Halberg, Harvey George, Jonathan Fuchs, Chiara Fulvi (London School of Economics), Christopher Shim, Karthik Neelamegam, Adithya Rajeev (University of Cambridge) | 07/04/2020
Aon and Willis Towers Watson:
Target: Willis Towers Watson
Estimated value: $30 Billion
Announcement date: March 9, 2020
Acquirer Advisors: Credit Suisse
Target Advisors: Goldman Sachs
Having considered and subsequently dropped plans to make an all-share offer for Willis Towers Watson only a year ago, Aon is once again set to acquire its fellow industry giant in a transaction expected to create the largest global insurance broker. With combined total revenues of $20bn in 2019, the deal would put Aon ahead of current industry leader Marsh & McLennan, which had revenues of just below $17bn in the same year. The deal comes a year after Marsh & McLennan acquired Jardine Lloyd Thompson in a £4.3bn tie-up, and follows the long-running trend of consolidation in the insurance broking industry.
The all-stock transaction, in which each WTW share will be exchanged for 1.08 Aon shares, values WTW’s equity at $30bn. At announcement, this represented a 16.2% premium to the target’s last closing price, on 6th March 2020, and implies an equity value for the combined business of $80bn. Upon completion, existing Aon shareholders will own approximately 63% of the business and existing WTW shareholders will own roughly the remaining 37%. The combined company is expected to benefit from synergies and from the addition of WTW’s specialist expertise to Aon’s corporate distribution, as well as greater combined free cash flow (of $2.4bn on a pro forma 2019 basis) to invest in new solutions and develop existing technology-enabled analytics platforms. These innovations could help the combined company to satisfy substantial unmet client demand in the industry and hence generate considerable upside. Therefore, the main challenge ahead for the prospective combined company is whether or not the integration process can be executed successfully – this remains to be seen.
Acquirer - Aon
Aon offers professional services for insurance brokerage and risk consulting. More specifically, it provides risk management for clients, placing risk with other carriers, negotiating and advice to clients for strategic human capital, retirement, human resource outsourcing, health and benefits, and compensation. Aon was formed in 1982 as a result of the acquisition of Combined Insurance Company of America by the Ryan Insurance Group and in 1987 was renamed Aon, which is a Gaelic word meaning "one." This company currently has employees operating in 120 countries.
- Founded in: 2017
- Headquartered in: London, United Kingdom
- CEO: Gregory Case
- Number of employees: 50000
- Market Cap: $35.7 Billion - EV: $43.7 Billion
- LTM Revenue: $11.0 Billion - LTM EBITDA: $3.2 Billion
- LTM EV/Revenue: 4.0x - LTM EV/EBITDA: 13.6x
Target - Willis Tower Watson
Willis Towers Watson is a broking, advisory, and solutions company which provides a range of consulting services, risk management, reinsurance, and insurance brokerage. Willis Towers Watson was formed in 2016 as a result of the merger of equals between Towers Watson & Co (which was based in Arlington, Virginia) and Willis Group Holdings (which was based in London, United Kingdom). As of now, Willis Towers Watson is the third largest insurance broker in the world with employees serving clients in more than 140 countries and markets.
- Founded in: 2016
- Headquartered in: London, United Kingdom
- CEO: John Haley
- Number of employees: 45000
- Market Cap: $20.2 Billion - EV: $26.2 Billion
- LTM Revenue: $9.0 Billion - LTM EBITDA: $2.2 Billion
- LTM EV/Revenue: 2.9x - LTM EV / EBITDA: 11.9x
The markets did not react positively to the announcement of the merger, with Aon’s share price plummeting by 16.3% to $179.91 and WTW’s share price falling by 8.7% to $182.25. However, while part of this downward movement is very likely due to the announcement, another part is also likely due to escalations in the coronavirus crisis which has caused shocks across the market.
The deal is expected to lead to approximately $800 million in annual pre-tax synergies and other cost reductions after 36 months, as a result of consolidating front office and back office functions and consolidating infrastructure relating to technology, real-estate and third-party contracts. The fact that the two companies’ headquarters are “metres” away from each other in central London also is likely to help reduce integration costs. Redundancies will be a natural consequence of these cost savings as labour is the most expensive asset in the insurance broking sector. On the other hand, retention costs amounting to $400 million are likely to be incurred as well.
Although cost-cutting is an incentive for the merger, the emphasis is on increasing product quality. The combination of the two brokers brings together complementary capabilities. For example, NewCo will have the ability to provide clients tools like WTW’s digital health platform and Aon’s digital risk platform. However, the considerable amount of overlap between the firms will mean that opportunities for cross-selling will be limited. On the other hand, with the combined firm revenue in excess of $20 billion in revenue and free cash flow of $2.4 billion flow (on a pro forma 2019 basis), they would possess the ability to make substantial investments in their data and analytic capabilities, which would allow them to better adjust to the new types of risks that clients are facing.
In the long-term, the merger is expected to allow the combined entity, which will operate under the name Aon, to address previously unmet client needs. Since the 1990s, there has been very little innovation in the insurance industry, and brokers seem to have fallen behind in terms of addressing new types of risks, such as cyber threats and intellectual property risks. According to a report by Aon, 6 out of the top 10 global risks are uninsured, and many others are difficult to model and predict, as is highlighted by the unanticipated global COVID-19 pandemic. According to Business Insider, the combined firm is expected to play a significant role in shifting the professional services industry towards a more digitised approach to business, integrating data analytics and artificial intelligence with more traditional business practices. Whereas Aon has already made steps in this direction by leveraging the power of analytics to enhance its advisory services, the expected $2.4 billion free cash flows of the combined firm, as mentioned above, will provide plenty of capacity to invest in new solutions, which can deliver significant upside in the future.
The merger fits into a broader trend of consolidation within the financial services industry, of which the recent acquisition of E-Trade by Morgan Stanley is another prominent example. This consolidation is at least partially driven by competition from fintech companies, which are tapping into consumer demand for a more digitised offering. The merger will better position Aon to face competition characterised by Lazarus AI, a startup that is revolutionising the use of AI in health insurance, and Spot, a new player that targets adventurous consumers offering tailored short-term policies.
By increasing its market power to become the largest international insurance broker, the combined entity will be able to leverage its size and capabilities to broaden its range of services and improve convenience for clients, who will be able to access both traditional and innovative insurance products from one platform.
“Our combined firm will accelerate innovation on behalf of clients and be better able to deliver more value to all stakeholders. And while we will be bigger, yes, that’s not what this transaction is about. This is about better,” said Greg Case, Aon CEO
Regulation arguably presents the most significant risk associated with this transaction. Aon will become the world’s largest commercial insurance broker and regulators will closely assess whether the deal will in fact benefit clients or solely increase the size of Aon. Before Aon abandoned their acquisition attempt last year, analysts at Wells Fargo & Co. argued that the regulatory process would be lengthy and ultimately contribute to the deal not going ahead. This year, various analysts covering the brokers echoed these issues once more.
Some of WTW’s business units may have to be disposed of prior to the acquisition receiving regulatory approval. Willis Re, WTW’s reinsurance business is one such unit as the reinsurance market is all but entirely dominated by the top three brokers, namely Aon, Guy Carpenter and Willis Re, so regulatory approval of a merger of two of these brokers seems unrealistic. Although disposals of such business units may also lead to a small loss in client numbers to independent brokers, a more significant loss of customers may result from an increased concentration of the pension administration business. Competing companies who previously had their pension schemes administered by either WTW or Aon may now have to move their accounts to independent providers in order to prevent conflicts of interest. Although the scale of this is not certain, it may reduce the economic viability of the transaction.
"Aon will almost certainly require some significant disposals to win approvals.” - Nick Ferguson, Insurance Asia News
COVID-19 may also take its toll on the deal. Processes essential to deal-making such as due-diligence and regulatory approval will be slowed down significantly due to government offices closing and other productivity-reducing policies implemented to prevent the spread of the virus. Although the “material adverse effects” provisions, which allow parties to get out of a deal in the case of an event significantly diminishing the value of one party, specifically exclude an event akin to COVID-19 as a potential deal breaker, the virus and a lengthy regulatory process may lead to a further delay of the deal.