Inside In Full: Opinion: Willis and its activist supergroup
One of the central challenges for any CEO is managing the competing needs of different stakeholder groups...
Successfully balancing the interests of investors, clients and staff can require a deft hand, and that challenge is magnified in struggling businesses.
As Carl Hess prepared to come into his kingdom as CEO of Willis Towers Watson in August, he already faced a fractured set of stakeholders with divergent interests.
A demoralized and depleted workforce needed to be convinced that there was a positive future for the company, and that this vision for a better tomorrow would be supported with investment in new staff and capabilities.
Meanwhile, investors wanted to hear that Willis would rapidly move to close the margin gap with its peers and support the share price with aggressive buybacks.
That already demanding balancing act has become materially more difficult in recent weeks, as news emerged of not one, not two, but three activist investors buying into the business.
This new constituency of shareholders probably creates an even more fractured stakeholder base, with their agenda likely to differ materially from Willis's longer term shareholder base.
And these are not just any activist investors. This is a super group of fearsome names in activism. Paul Singer, who heads Elliott Management, has been called the most feared investor in the world thanks to a playbook that often includes agitating for a sale or the break-up of a business.
Current targets include pharmaceutical giant GSK where Elliott has pushed for the CEO Emma Walmsley to be obliged to reapply to the board for her role, and a FTSE-100 energy firm where the hedge fund is advocating a break-up.
Starboard Value, meanwhile, has repeatedly successfully nominated slates of directors to company boards and consistently influenced company strategy at its targets. It has caused major changes of direction at companies as diverse as AOL, Olive Garden-owner Darden Restaurants and tech firm Tessera.
The Children's Fund's activism, meanwhile, has included the successful opposition to Deutsche Börse's proposed takeover of the London Stock Exchange and efforts to force through the break-up of Dutch Bank ABN Amro.
Willis's activist supergroup
Source: Inside P&C
These are serious companies, with well-developed approaches and records of consistent success. Based on the evidence, there is a high likelihood that they will play a major role in shaping the evolution of the Willis story, and the strategy management chooses to pursue.
A narrow path forward
I have written at length in the past about the challenges that Willis faces as it looks to pick up the pieces following the collapse of the Aon deal, including the need for the new management team to establish a compelling vision for staff, re-establish a positive culture, create a compelling employee value proposition and invest to rebuild the franchise.
Through its investor day the company had already indicated that management priorities would include aggressive capital return to shareholders through a $4bn buyback, and early margin improved (300 bps through 2024). But sources have suggested that there is also money for investment, and that Willis is back in the market looking to replenish and upgrade its talent base.
Particularly given the market tailwinds and the resilience of broking/professional services firm, Willis can be fixed. It is less clear that everything management is targeting can be done at once, as the Inside P&C Research team pointed out in its piece “Whack-a-mole” .
The presence of the activists creates an even narrower path forward for the management team.
It is not clear the extent to which the strategy set out on the investor day on September 9 was formulated with knowledge that the company faced an immediate activist threat, although the emphasis by that point was already very heavily on crafting a pro-shareholder narrative.
Regardless, Hess and the management team will now need to go about the task of turning around the company while holding off the activists.
The activists are yet to reveal their agenda – or agendas – publicly. But the fear has to be that they will force Hess' hand into even more short-term shareholder-friendly moves at the expense of the franchise-building the business needs.
Although Willis is clearly a wounded firm, it is not necessarily the most obvious target for some standard activist plays.
First, as much as there has been little in the way of positive synergies through the Willis-Towers merger, it is also not clear that there is a great value unlock that can be achieved through a break-up.
With Willis trading at 13.3x forward Ebitda, it is difficult to see a great deal of accretion from selling assets – with the intangible benefits from a more focused group likely to take a long time to prove out.
Willis has also strongly signaled against this path by moving some of the key P&C broking leadership such as Alexis Faber up to group level roles, something it would be unlikely to do if it were prepping it for sale.
As for the viability of the other short-term activist-friendly move – a sale of the company – opinion is divided.
The only possible trade buyer for Willis is AJ Gallagher, and it seems satisfied with Willis Re. Which leaves private equity as the only possible buyer.
Willis' share price is lagging peers, but once you put a control premium on top of it the take-out would not look particularly cheap at 16x-17x Ebitda, and it would be hard to expect much if any arbitrage between the entry and exit multiples unless the market moved up as a whole move up.
So PE would need to find a way to hit its return hurdles largely by closing the margin growth and delivering growth to drive earnings (as well as through leverage). Arguably, this could be done by the right management team, but it is not a slam dunk.
And moreover, this would be the take-private of a company with a $31bn market cap. To do that, you would need an almighty PE consortium, spearheaded by the right executive to get the job done.
It is hard to feel that the thesis behind the activism rests on such a deal being done.
Without an obvious restructuring story and with a sale challenging, this may mean that aggressive cost-cutting to close the margin gap is the real load-bearing pillar of the investment thesis.
And that will be hard yards, given that Willis has been trying to drive improved margin for some time, with limited success and given it is about to lose its highest margin business, Willis Re. If rapid progress is not shown on that front, the activists could become more aggressive.
At that point – if not before – Hess and the board could find themselves directly in the firing line.
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