Disruption likely to be a result of Aon-WTW merger

Industry sources expect upheaval for clients and employees as executives work through the details of Aon PLC's purchase of Willis Towers Watson PLC.

The two firms — known in institutional circles as investment consulting and outsourced CIO giants — announced March 9 they will combine by mid-2021. The agreement, which is subject to regulatory approvals, will see Aon buy rival WTW in an all-stock $30 billion deal, creating an $80 billion firm.

Pensions & Investments data show Aon had $3.52 trillion in institutional assets under advisement as of June 30, while WTW had $2.6 trillion. The combined total still leaves the firm behind Mercer, with assets under advisement of $15 tril- lion. The combined firm would have ranked as the largest outsourced manager, with $290 billion in OCIO assets under management, according to P&I data as of March 31, 2019. Mercer had $230 billion as of that date.

The combined firm will be led by Aon CEO Gregory C. Case and Aon Chief Financial Officer Christa Davies. WTW CEO John Haley will become executive chairman. Aon shareholders will own about 63% of the new firm — named Aon — while WTW shareholders will own about 37%.

While investors and money managers know Aon and WTW for their prowess in the retirement business, sources think their investment consulting, OCIO and actuarial units are actually "collateral damage" in a deal that is, ultimately, about insurance.

"You can look at the Mercer/JLT deal as a template" in that the attraction is the insurance business, said Dean Wetton, managing director at investment consulting firm Dean Wetton Advisory Ltd. in London, referring to Marsh & McLennan Cos. Inc.'s 2019 acquisition of Jardine Lloyd Thompson.

"I think it's purely an insurance play — that's what drove the Mercer/JLT merger, and I genuinely think investment consulting and fiduciary management are a side issue for them. Compared to the revenues from insurance, it's not the main driver," said Roger Brown, founder and director of IC Select Ltd. in Edinburgh, which helps retirement plans evaluate and choose investment consultants and OCIOs. "I think we call it collateral damage. In actual fact, I can't see any great logic … if it weren't for the insurance business, would Aon be looking to buy WTW and vice versa?"

Consulting, investments and retirement business accounted for 16.5% of Aon's 2019 revenue, according to figures from Bloomberg. For WTW, revenue across business segments that provide retirement, benefits and outsourcing services accounted for 48.6% of 2019 revenue.

The firms' already significant market shares in each practice, as well as the problems that such acquisitive growth may bring, are further evidence that the merger is not just about gaining scale in retirement-related business.

Aon and WTW are two of the three largest firms operating in the investment consulting sector in the U.K., and two of the five largest in the OCIO market, according to the country's Competition and Markets Authority, which looked at concentrations within these types of business in 2018.

Merging the investment consulting or OCIO businesses together could potentially cause competition and concentration concerns. The CMA's 2018 investigation concluded that with no firm holding more than 20% market share in either business, concentration was not a concern.

After the merger, the combined firm's investment consulting and OCIO units will each have "over 20% market share, so it seems fairly certain that, even on the minimums, they will be heading for a referral" to the CMA, Mr. Brown said. He thinks the period of time allowed to completing the acquisition shows the firms may be expecting a regulatory review of some kind.

"There may be a recognition that if these two firms are completely joined, they will attract a lot of heat from the CMA," Mr. Wetton said.

Aon and WTW's investment consulting market shares each totaled between 11% and 16% in 2016 by revenue, according to the CMA. OCIO business was between 9% and 16% for each firm. The CMA did not identify specific market shares.

One answer is to split off one or both of the consulting and OCIO units. "They could be looking at a spinoff — given the revenue and profitability, (my guess is) they'd keep the fiduciary management business and spin off the advisory" unit, said one source in the advisory industry who spoke on condition of anonymity. OCIO contracts can attract multiple times the fees associated with investment consulting.

And there's also the multiemployer defined contribution, or master trust, business to consider. "I can see Aon saying, we have a relatively small master trust, we could get our hands on LifeSight, which does seem to be winning some clients," Mr. Wetton said. Assets for the Aon MasterTrust, London, were not available. The LifeSight Master Trust, London, has £7.5 billion in assets. "I can't see Aon wanting to give that up, but who knows what the CMA will do," Mr. Wetton said.

A CMA spokewoman said the authority "cannot speculate as to which mergers it may or may not investigate. Any live cases are listed, and announced, on our website."

A spokeswoman for Aon declined to comment. WTW spokesmen were not available to comment.

For clients, a key aspect of the combination will be which of the two firms wins out in terms of the approach to investment consulting and OCIO business.

"I don't think it is necessarily good for the clients because we do see them as culturally very different, particularly in their approach to manager selection," Mr. Brown said.

Sources agreed that both firms believe in diversification and investing in passive strategies unless adding value from active management can be justified.

But manager research processes, for example, are different. "Aon is very much, 'we'll find the best-in-class managers and build them into portfolios.' Willis Towers Watson also looks to find the best-in-class managers but … is more proactive in creating (customized) funds for clients," Mr. Brown said.

While the results do not really differ, clients will still be affected. "So one set of clients … will end up with quite a different proposition. This will particularly affect the fiduciary management clients," he said.

Clients on the investment consulting side may also be unsettled by the merger and any staff turnover that comes with it. Sources noted that as with any merger — as well as the inevitable redundancies that come with the overlap of business units — personnel tend to move on from their roles.

"That will probably also result in some clients looking to move. If your lead consultant goes, that's sometimes a trigger," said the source in the advisory industry. With plans increasing their focus on governance, evaluation of existing consultants is likely, he added.

OCIO competitors to Aon and WTW "are rubbing their hands at the thought of even more fallout to follow the last 12 months of mergers and get-togethers that has given opportunity at the smaller end of the market," said a source in the money management industry who spoke on condition of anonymity.

The same goes for the investment consulting side, with the potential for the merger to further open up competition. "There is diversity of thought — this should be an opportunity for independents. It is really difficult because the buyers seem to cling onto these big-brand names. Hopefully this consolidation at the top means everyone moves up a bit in that process," Mr. Wetton said.

While it was not unusual to see both Aon and WTW on client shortlists for both consulting and OCIO, new business will be harder to come by, sources predicted.

"I would suggest (clients) are probably more nervous about appointing either firm at the moment — so in my mind, it will slow down the growth of both of their fiduciary management businesses in the next 12 months," said the advisory business source.

For existing clients, "it's a worry if they have to retender in the next year — can you really stay with an organization if it might not exist in the next year? That's a big hurdle for a trustee to get over," Mr. Brown said. The advice for now, however, is to sit tight.

And that seems to be the approach of one client.

"Aon has been our fiduciary manager since July 2019, having been appointed following a carefully run tender process. We value our ongoing partnership and remain confident in Aon's ability to deliver against our specific scheme funding objectives now and in the future. As a client, we were notified of the merger," said Jerry Gandhi, pensions manager for the U.K. and Ireland at Schneider Electric SE. The firm was appointed as the sole fiduciary manager for the firm's £400 million Schneider Pension Plan, London.