Willis, Towers Watson to Join in $18B Merger

Willis Group Holdings and Towers Watson plan to merge in an all-stock deal creating a firm with an equity value of about $18 billion.

As part of the transaction, Willis shareholders will own 50.1% of the combined company, while Towers Watson will own 49.9%. Towers Watson shareholders will receive a one-time cash dividend of $4.87 per Towers Watson share, and about 2.65 Willis shares for each Towers Watson share. Reports, including a Bloomberg story, say this amounts to Willis buying Towers Watson for about $8.7 billion.

Moody’s Investors Service affirmed Willis’ ratings after the deal was announced and changed the broker’s outlook to stable from negative due to the improved business diversification the combined firm, which will be called Willis Towers Watson, will have.

“The proposed merger would transform Willis by approximately doubling its size and adding a leading benefits consulting operation,” says Bruce Ballentine, Moody’s lead analyst for Willis. “The combined firm would have good financial flexibility, given that Towers Watson carries significantly less debt than Willis,” added Ballentine.

Fitch Ratings placed Willis on Rating Watch Positive, stating, “The transaction creates a larger, more diverse entity with operating franchises in several non-capital intensive fee- and commission-based businesses, including insurance brokerage and consulting services in employee benefits, human resources and risk and capital management. The transaction also creates opportunities to leverage existing Towers Watson relationships to increase penetration in the larger U.S. P&C corporate market and to expand Towers Watson’s international profile.”

Towers Watson shareholders

Some media reports however, suggest Towers Watson shareholders may feel they had the better company even though Willis shareholders will control 50.1% of the combined company. A Wall Street Journal article (subscription required) says Towers Watson shares dropped 8.8% on June 30 when “investors realized what they were actually getting….”

A Forbes article reports, “A look at the structure and timing of Tuesday’s deal indicates that Towers Watson shareholders may be leaving a lot on the table, and entering a transaction with significant strategic risks, all for the benefit of revenue synergies and the tax savings that would come from shifting its corporate tax headquarters to London, where Willis is based.” the article compares the strong growth of Towers Watson’s revenue and share price over the last 12 months to Willis’ “falling profits and relatively stagnant share price over the year.”

A number of law firms have already announced they are investigating Towers Watson’s board for a potential breach in fiduciary duty, contending that the $125.13 for each share of Towers Watson common stock shareholders would receive is too low based on analysts’ valuation of Towers Watson.

Execs focus on the positives

Executives from both Willis and Towers Watson, though, discuss what the combined enterprise can accomplish going forward. John Haley, chairman and Chief Executive Officer of Towers Watson, says in a statement, “We see numerous opportunities to enhance our growth profile by offering integrated solutions that leverage Willis’ global distribution network and superb risk advisory and re/insurance broking capabilities to deliver a more robust set of analytics and product solutions across a broader client base, including accelerating penetration of our Exchange Solutions platform into the fast growing middle-market.”

Dominic Casserley, Willis CEO, says, “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.”

The companies also point to the potential for accelerated growth in the health exchange market, where Towers Watson’s product Exchange Solutions — which enables companies to transition an employee or retiree to individual plans — can be marketed to Willis’ “significant middle-market relationships.”

New structure

According to the companies, Willis Chairman James McCann will become Chairman of the combined Willis Towers Watson. Haley will be CEO, and Casserley will be president and deputy CEO. The company’s board will have 12 directors total — six nominated by Willis and six by Towers Watson, including Towers Watson’s and Willis’ current CEOs. Towers Watson CFO Roger Millay will be CFO of the new company.

A Bloomberg story notes Casserley, because he would not be the most senior executive at the combined company, is eligible for a compensation package valued at $17.7 million, but he opted against taking it.

The transaction is expected to close by Dec. 31, and is subject to regulatory approvals and approval by both Willis and Towers Watson shareholders.