Towers Watson & Co. is facing opposition to its proposed merger with Willis Group Holdings PLC from proxy-voting advisory firms Institutional Shareholder Services and Glass Lewis & Co., and money manager Driehaus Capital Management LLC.
Still, another advisory firm, Egan-Jones Proxy Services, recommends Towers Watson shareholders vote in favor of the proposed merger and activist hedge fund manager ValueAct Capital Management called opposition to the proposed merger with Willis Group Holdings “bumpitrage.”
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's 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 Nov. 6, 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.”
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.
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.”
But an Egan-Jones report said the proposed merger's “advantages and opportunities outweigh the risks associated to the transaction.”
And in a news release, ValueAct Capital Management singled out ISS for recommending shareholders vote against the proposed transaction, accusing it of “legitimizing ... bumpitrage.”
In such situations, “stockholder activists purchase the target company stock exclusively to lobby for the proverbial bump,” the news release said. “ISS encouraging stockholders to walk away from a highly accretive deal if they do not receive a renegotiation of the deal economics incentivizes the very shortest-term profiteering. It gives an opening for short-term investors to run into every deal and attempt to collect a tax. When this goes badly, longer-term stockholders suffer the opportunity costs of missed value creation.”
ValueAct owns 475,000 Towers Watson shares and 18.4 million, or 10.2%, of Willis' outstanding shares. ValueAct entered into a voting agreement with Towers Watson to vote in favor of the merger, while it also intends to vote its Willis shares in support of the transaction, the release said. Towers Watson has 69.2 million shares outstanding.
The proposed deal “should be highly accretive to both sets of stockholders over a multiyear time horizon,” the ValueAct release said.
“It is indisputable to say that the deal would be better for Towers Watsons stockholders if they got better economics. Likewise, the deal would clearly be better for Willis stockholders if they received a premium in line with other transactions involving Irish-domiciled companies merging with U.S. (companies),” the ValueAct release said. “But, at the end of the day, this is a fair deal negotiated in good faith by two management teams and boards of directors”
A call to ValueAct was referred to Allison A. Bennington, general counsel and partner, who couldn't be reached for comment. Subodh Mishra, ISS executive director, communications, declined comment.
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 special meetings of Towers Watson and Willis are Nov. 18.