Towers Watson & Co. is facing opposition to its proposed merger with Willis Group Holdings from proxy-voting advisory firms Institutional Shareholder Services and Glass Lewis & Co., and money manager Driehaus Capital Management.
Egan-Jones Proxy Services recommends Towers Watson shareholders vote in favor of the proposed merger.
Driehaus called the proposal a “value-destroying acquisition” of Towers Watson, according to the money manager's website.
ISS, Glass Lewis and Driehaus contend the proposed merger price is inadequate for Towers Watson. The valuation represents a 9% to 9.3% discount in Towers Watson stock price from the announcement of the proposed merger on June 30, according to the respective reports of Glass Lewis and ISS.
The merger was valued at $8.7 billion, or $125.13 per Tower Watson share, the day before the announcement of the proposal last June 30. If completed as proposed, Willis shareholders will own 50.1% and Towers Watson shareholders will own 49.9% of the company that would be renamed Willis Towers Watson PLC.
Driehaus places the discount in the offering price at 6% as of midday trading Friday, said Matthew Schoenfeld, Driehaus assistant portfolio manager, in an interview. Driehaus is short Willis stock, Mr. Schoenfeld said, declining to disclose the number of shares.
Driehaus holds 1,175,113 Towers Watson shares, amounting to 1.5% of the company, according to filings with the Securities and Exchange Commission.
The proposed merger “is no desperation sale, and no one has suggested Towers' future as a stand-alone entity is particularly dim,” the ISS report said. “On Nov. 2, 2015, the company released earnings that appear to reaffirm the notion that its stand-alone prospects are healthy.”
In its report, Glass Lewis sees “little financial incentive, other than the hope of participating in merger synergies which aren't expected to be fully realized for three years, for Towers Watson shareholders to accept a proposal which implies the largest discount of any merger of equals transaction involving a U.S. target in the past 10 years.”
An Egan-Jones report said the proposed merger's “advantages and opportunities outweigh the risks associated to the transaction.”
Bradley Dawson, Driehaus vice president of marketing and product development, said Driehaus analysts believe the merger will not win approval from a majority of shareholders, a failure in the proposed deal that will hurt Willis financially.
Driehaus executives have reached out to John J. Haley, Towers Watson chairman and CEO, but have not received a reply, Mr. Dawson said.
The market discount of the deal shows Towers Watson “shareholders believe the deal is unfair, and a better offer needs to be put on the table for shareholders or Towers Watson should proceed as a stand-alone company,” Mr. Schoenfeld said.
For the market to value a stock higher than the offering pricing “is very unusual because it disadvantages shareholders and indicates shareholders are not happy with the deal,” Mr. Schoenfeld said.
Mr. Schoenfeld said the Driehaus short position on Willis does not represent a conflict of interest but a risk arbitrage. The value of Driehaus' Towers Watson shares is “significantly higher” than the value of the Willis short position, he added.
Under the proposed merger agreement, for each share they own, Towers Watson shareholders would receive 2.649 Willis shares and a $4.87 special dividend.
The merger requires approval of Towers Watson shareholders. The merger is not conditioned on approval of Willis shareholders, who are being asked to approve a stock issuance for the merger, name change and upon completion of the merger a share reserve split.
Both ISS and Glass Lewis recommend Willis shareholders approve the Willis share issuance and name change. ISS opposes the share consolidation, while Glass Lewis supports it.
In midday trading Friday, Towers Watson stock was priced at $127.97 a share, while Willis stock was priced at $44.09 a share. The midday price implies a $116.79 value to Towers Watson shareholders for the equity part of the Willis merger deal, amounting to an 8.7% discount from the midday Towers Watson share price or including the special dividend, a 4.7% discount.
The special meetings of Towers Watson and Willis are Nov. 18.