Could the Aon/Willis Towers Watson merger be in jeopardy?

“Does the combined entity provide enhanced service and solutions for the benefit of the client?”. Stefan Holzberger, senior managing director and chief rating officer at AM Best Rating Services.

​· Renewed deal back on the table just as COVID-19 goes truly global
· Share prices for both brokers continue to fall as virus crisis deepens
· Precedents already there for external market forces to scupper M&As
· Regulator probes expected to add to deal stressors

With markets in turmoil, and rumours that trading centres could shut down, this M&A has hurdles aplenty to clear before it can get close to completion.

In an age of surreal international news, confirmation that the $30 billion merger of Aon and Willis Towers Watson (WTW) was back on seemed almost run of the mill in comparison.

But for those in the industry, this 2020 announcement was the one to watch in light of the potential wider impacts and that it follows an aborted attempt at an M&A between the two 12 months earlier.

Insurance broking giant Aon revealed its plans to buy competitor Willis Towers Watson on March 9, 2020, almost a year to the day after the idea first surfaced on March 5, 2019.

But the global broking firm will be hoping that this $30 billion all-stock transaction gets a lot further than the 2019 “early stage” proposals, which hit the buffers within 24 hours.

In 2019, the day after the M&A news was out, shares in WTW rose by more than 8 percent, while Aon shares dropped sharply on the NYSE from $170.63 on March 4, 2019, to $157.25 on March 5. Fortunes changed again, when Aon declared it would not buy WTW just a day later on March 6, 2019, and Aon’s share price began to recover.

Such a swift termination of the prospective deal silenced speculation that it would bring “job carnage”, a reduction in choice for insurance and reinsurance buyers, and “a bigger stick to beat insurers and reinsurers on prices”.

In spite of such doom mongering from some industry commentators, the reconstructed M&A was back on the table for 2020 - just as the coronavirus COVID-19 started to go truly global.

In a relatively short time, the pandemic has slammed financial markets, with values continuing to plunge, and rumours about the closure of trading at markets, such as the London Stock Exchange, swirling around.

Before the outbreak had really started to take hold in mid-March 2020, the share prices of both brokers were already dropping.

Aon’s share price on March 6, 2020, ahead of the M&A announcement, was $214.81 on the NYSE. It dropped to $178.93 on March 9, 2020, then rebounded to $183.10 on March 10, and rose again on March 11 to $184.98. But after this rally, the price slumped hitting $159.49 on March 24, a far cry from the 12-month high of $237.43 on February 19, 2020.

On the Nasdaq, the WTW share price was $199.71 on March 6, 2020, before the deal was revealed. It fell to $184.74 on March 9, rallying slightly the day after to $187.67, and rising again on March 11 to $188.25. However, like Aon’s share price, WTW’s price then began to fall reaching $163.32 on March 24, again well below its 12-month high of $220.06 recorded on February 5, 2020.

“The ongoing decline in share price for both firms has been driven primarily by market forces affecting all companies operating in the financial services sector, rather than investors taking issue with the combination of these two firms,” says Stefan Holzberger, senior managing director and chief rating officer at AM Best Rating Services.

“That said, at the time of the announcement, there was some sentiment that Willis was giving up an enviable position as the broker that was not too big, yet not too small either. A broker that could compete with the largest players in the market, but also small enough to be nimble in quickly addressing customer needs.”

He said that ultimately, the success or failure of the merger, beyond the immediate cost-saving synergies, “will depend on how well the combined entity’s leadership melds the two corporate cultures into one. The key question being does the combined entity provide enhanced service and solutions for the benefit of the client?”

Before any assessment of the completed M&A’s success can be surmised, commentators are questioning whether the added pressure of COVID-19 could delay or even derail the deal. And there is precedent for external market forces to scupper seemingly ironclad mergers.

The joining of mining sector leviathans, BHP Billiton and Rio Tinto, reported to be valued at $173.2 billion, had looked like a good bet in 2007. A year in the making, the consolidation of these two firms would have brought together the second and third largest iron ore producers in the world, giving them a huge sway over pricing of the ore, which is a major element in making steel.

But the 2008 global credit crunch drove down commodity prices, which in conjunction with other regulatory requirements, forced BHP Billiton to call off its takeover. The financial crisis of 2008 also put paid to Qatari interest in UK supermarket chain Sainsbury's.

But regulators alone have also managed to prevent mergers. Earlier this month, Simon Fitzsimmons, director corporate finance at Mazars, told Intelligent Insurer that the Aon/WTW M&A could take over a year to go through as both brokers will be “heavily scrutinised” by the Competition and Markets Authority (CMA), while Aon itself has acknowledged the deal will take some time to get regulatory approval.

There are plenty of precedents for regulators throwing a spanner in the M&A works. In February 2017, mega US health insurers Aetna and Humana were forced to abandon their $37 billion merger when a US federal judge ruled it would seriously undermine competition in the sector and blocked it. Another large US health insurer tie up between Anthem and Cigna Corp in 2015, reportedly worth $50 billion, was also blocked by US regulators over market competition concerns.

With so many competing pressures, what is the outlook for the Aon/WTW merger going ahead?

Holzberger says: “The economic and financial market conditions certainly do not make the road to completion any easier. That said, we would expect due diligence and regulatory submissions to progress – albeit at a slower pace as regulators’ priorities get pulled in a different direction.

“As with the Marsh/JLT deal, the combined entity might be determined to be anti-competitive. This would most likely lead to the divestiture of a piece of the business, rather than putting the entire deal at risk.”