The news that Aon was to acquire Willis in a $30bn deal was both a huge shock and utterly predictable...
Shocking because it will fundamentally shift the competitive landscape within broking, and utterly predictable because the rumours about the deal have been incessant in recent months.
Lips have been so loose around the potential deal that it has been openly discussed in analyst notes and by executives on platforms at industry events, with the end of the standstill under the Irish takeover code generating press notice.
With up to 15 months to run before anticipated closing we’ll be following developments closely, but here are a few preliminary observations.
- Value creation through synergies/closing the margin gap – Aon's team talked about the deal as an accelerant to Aon United, and a means of turbo-charging innovation and thus growth, repeatedly on the call. But despite efforts to downplay the significance of the financial element of the deal – as was seen immediately after MMC-JLT – this transaction offers scope for huge value creation. The company talked about $800mn of synergies at maturity which it equated (very conservatively) to $10bn of value. But this target is set at just 5 percent of the combined operating base. And as well as typical deal synergies, it is worth noting that Aon will expect to close the circa 700 basis-point margin gap between it and Willis, in part by leveraging its successful firm-wide back- and middle-office integration. The opportunity is also made more compelling given that Willis trades at a discount to Aon, had underperformed its acquirer on the stock market by close to 15 points over the last year, and represents a control premium of only 16 percent. If the capabilities provided by things like Tranzact and Towers Watson's pension advisory and actuarial businesses allow Aon to offer improved solutions to clients, as well as to more easily bear the costs of investing in data and analytics, that will unlock another tier of value. Nevertheless, there will be some market watchers who will find it difficult to reconcile Aon's talk about increasing the size of the industry pie and addressing uninsured client needs with a deal that offers synergies and scale like nothing seen in broking before.
- The pitfalls between this point and success are huge – It is difficult to take much from the market response to the deal yet given that coronavirus fears have shorn equity markets of buyers and are amplifying downward pressures, but as of early afternoon in New York – after US stocks resumed trading following a brief suspension – Aon was down 16 percent versus about 5 percent for the market and about 4.4 percent for MMC. This may point to some scepticism around the deal, or it may reflect merger arb activity on the kind of off-risk day when you would never want to announce such a transaction. Notably, MMC is understood to have believed that a deal with Willis Towers Watson was undoable. Aon says it has had advice on the anti-trust piece and seemed to imply that it expects no forced divestitures. Satisfying close to 100 regulators as they bring together the number two and three businesses in a sector will be at the minimum a huge test. There are range of other potential issues around execution, where Aon management will need to prove its mettle. These include the potential for talent flight, issues created by management distraction due to the integration, and the scope for revenue leakage both from staff departures and from clients unhappy with the concentration with a single broker. These could make it hard for the company to hit its mid-single-digit or greater organic growth target. There could also be cultural issues for Aon as there were following the Towers Watson-Willis deal, as consultants and actuaries are brought together with brokers. The length of wait for the deal to close – potentially as much as 14 months – will also create acute challenges within Willis around talent retention and revenue production.
- A golden chance for independents – The deal will make Aon a $20bn revenue business on a pro-forma basis – 20 percent bigger than MMC. But more importantly it will create something like an industry duopoly, with a massive drop in revenues to get to Gallagher at around ~$7bn. And in areas like Fortune 500 clients and reinsurance broking, the concentration will be huge. Following hard on the heels of MMC-JLT, this will super-charge the opportunity for independents to gain market share. The obvious beneficiaries include Gallagher, Hyperion, Lockton, McGill and Partners, BMS and TigerRisk.
- Bad news for insurers – The greater scale of Aon will create additional market power, which is likely to be a negative for (re)insurers on pricing and potentially other areas like claims paying and spend on strategic carrier arrangements. One senior broking source put the estimated combined London market share for Aon-Willis at 65 percent, and in reinsurance it looks to be comfortably over 50 percent.
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