Towers Watson, Willis merger to combine strengths

Towers Watson & Co., with $2.2 trillion in assets under advisement, is expected to dominate the investment consulting arm of the business after it combines with Willis Group Holdings PLC, sources said.

But those sources also said they expect the merger to be the end of Towers Watson's status as a serious bidder for Russell Investments.

The merger, expected to close by the end of the year, will create a new company, Willis Towers Watson PLC.

Michael Rosen, principal and chief investment officer of Santa Monica, Calif.-based consultant Angeles Investment Advisors LLC, speculated that Towers Watson should control that area in the combined business.

“Towers Watson has the stronger investment consulting presence, and I would expect that group to lead the new group effort,” Mr. Rosen said.

Another investment consultant, Jeffrey MacLean, CEO of Seattle-based Verus, noted: “It appears cross-selling is the primary objective” for the merger.

Although Mr. MacLean declined to elaborate, a presentation from the companies show that through the merger, Towers Watson will have access to Willis Group's insurance offerings, while Willis will have access to Tower's Watson's treasury, investment consulting and outsourced chief investment officer services.

Paul Deane-Williams, a spokesman for Towers Watson, declined to comment on any details concerning the future of the new business.

In a conference call on June 30 discussing the deal, Willis Group CEO Dominic J. Casserley explained that “the broad global footprint will enhance Towers Watson's global health and group benefit solution and exchange platform. It will also leverage both companies' ability to serve multinational human capital and benefits clients.”

Mr. Casserley added that, “in North America, Willis will be able to rely upon Towers Watson's large company relationships to increase our penetration to more than $10 billion U.S. large property and casualty corporate market. Towers Watson will be able to accelerate the growth of its one exchange offering to increased access to Willis' existing U.S. middle-market distribution channels.”

Also on the call, Towers Watson's chairman and CEO John Haley said that this merger creates a “global platform with offerings across the advisory, broking, special capabilities and solutions spectrums.”

Most Towers Watson investment consulting clients contacted for this article declined to comment, but one was sanguine.

Tammy Ridout, a spokeswoman for American Electric Power Co., Columbus, Ohio, one of Towers Watson's investment consulting clients, said in an e-mail: “We don't expect any impact on our relationship from the merger.”

One private equity investor who asked not to be named said he believed the Willis-Towers Watson deal would most likely “lead to the consolidation (and) rationalization of their consulting groups and their investment functions.”

Domonkos L. Koltai, a partner and co-founder of investment bank PL Advisors, New York, wasn't so sure what the merger would mean for Towers Watson's consulting offerings.

“It is not entirely clear the deal will close without concessions,” Mr. Koltai said. “The Towers Watson share price is down from before the announcement, and shareholders are complaining about a lack of a premium. Very likely, though, that will be overcome.” Shares of Towers Watson fell 8.8% at the close of market on June 30, the day of the announcement, to $125.80.

Mr. Koltai added he thinks “investment consulting will be a pretty small part of the overall business.”

Towers Watson had more than 50% of revenues from benefits consulting. Willis is mainly an insurance broker. The combined company will have 43% of revenues coming from “human capital and benefits” and 35% from “corporate risk and broking,” the company presentation said.

With the investment consulting, risk and reinsurance segment making up 17% of revenue pro forma, Mr. Koltai said it is fair to assume “investment consulting is less than a third of that segment.”

PL Advisors did not advise either Willis or Towers Watson on the deal.

As recently as May, Towers Watson was adding to its investment consulting staff. Towers Watson recruited four investment consultants from Wilshire Associates. William G. Bensur Jr. came aboard in May, and Mike Dudkowski, Jim Neill and Michael Patalsky joined in January.

Sources also noted the merger most likely puts an end to the rumored Towers Watson-Russell Investments deal. Towers Watson was said to be one of the three final bidders for Russell, along with two China-based firms: online gaming company Shanda Group and financial services firm CITIC Group Corp.

The private equity executive said he finds it “very unlikely that deal would proceed with a Willis-Towers Watson merger in the works.”

He added: “I believe (Russell) has just lost its primary buyer. I suspect the Russell sales process will need to be restarted with new buyers and revisiting prior bidders.”

The executive also said that, as a result of the Willis-Towers Watson deal, he suspects the price of Russell to have “dropped meaningfully,” because, with Towers Watson focused on its merger, seller London Stock Exchange Group PLC would have little to no leverage in maximizing the price.

“I assume that this deal would eliminate Towers Watson's interest in Russell for the time being,” Mr. Koltai agreed. “It is hard to pull off an acquisition during a merger.”

(Late last week there were reports that CITIC Group was in negotiations to acquire Russell in what is expected to be a $1.8 billion deal.)

This isn't the first time Towers Watson has experienced M&A activity. Although having roots from various earlier companies dating back to the 19th century, Towers Watson was officially formed in 2010, when consulting firms Towers, Perrin, Forster & Crosby Inc. and Watson Wyatt Worldwide Inc. merged in a deal worth an estimated $3.5 billion.

Once the all-stock merger closes by Dec. 31, the newly combined advisory and insurance company will have a combined market value of $18 billion. Willis shareholders will own about 50.1%, and Towers Watson shareholders will own about 49.9% of the combined company.

The combined company will have approximately 39,000 employees in more than 120 countries and revenue of approximately $8.2 billion. Through the deal, Towers Watson shareholders will receive 2.649 Willis shares for every Towers Watson share. Towers Watson shareholders also would receive a one-time cash dividend of $4.87 per Towers Watson share pre-closing,

Mr. Haley will become CEO, while Mr. Casserley will be president and deputy CEO. Willis Chairman James McCann will become chairman of the combined firm.

On June 9, audit, tax and advisory firm KPMG LLP entered into an agreement with Towers to acquire the company's Human Resources Service Delivery practice for an undisclosed sum.

Towers Watson spokesman Josh Wozman said the company was declining to comment on whether other parts of the firm were up for sale.