This is a huge coup for the firm as CEO Carl Hess works to turn it around following the break-up of its sale to Aon, a deal that came after a sustained period of listless management and underperformance.
One of the central challenges of WTW’s broking business – which is only 65% the size of its health, wealth and career business - has been the huge exodus of talent resulting from the unhappiness and uncertainty created by the Aon deal through 2019-21.
Clarke’s hire is a major milestone in WTW’s fightback. She is among the most highly regarded broking executives in the world, and has remarkable followership both with her staff base, clients and carriers. (Private equity watching in the wings will also be aware of her reputation.)
In addition, her style of leadership aligns with a legacy Willis culture that was softer and more people-centered than Marsh and Aon. That culture took a beating under John Haley’s leadership, but elements of it were able to persist, and may now be nurtured back to health.
As will be covered in greater depth below, Clarke’s key focuses should include (1) adding additional external talent, and getting WTW’s key staff into the right seats. She should also look to (2) secure capital to support a broking M&A strategy.
It will also be crucial to (3) put the longstanding issues around growth in North America firmly in the past, and to work to optimize (4) the organization to narrow the margin gap without hurting client outcomes.
Clarke will also need to come up with an answer to the fiendish question (5) of what to do in reinsurance where WTW’s non-compete will soon expire.
In working on all of these focus areas, Clarke will benefit from the resilience of large broking organisations, as well as a 200-year-old brand and goodwill in the market. It really is hard to kill these entities, and new leadership has time to make good shortcomings.
The group level questions: Take private and/or breakup?
A major move like the addition of Clarke warrants a step-back look at WTW’s future – because these questions about the broking business play out against larger questions that the board must answer.
For some time given the failure of the 2016 Towers Watson-Willis merger, and following the collapse of the Aon-Willis deal, the turnaround has been viewed against the backdrop of two central questions.
a. Should WTW be taken private?
b. Should WTW be broken up?
Obviously, a) and b) are related. If you answer affirmatively to b), there is a greater case for a). If you are intending to take less drastic measures, then you have more chance of succeeding without resorting to a).
The presence of a trio of activists – Elliott, Starboard and TCI – in late 2021 seemed to point to the likelihood of at least one of these two paths as a path to unlocking value.
However, nothing has been heard from Elliott in some time, and one source suggested that the hedge fund – which owned its position via derivatives – no longer has a financial interest in the company. TCI also never showed up on the shareholder register, and has again been silent.
Starboard remains on the list, but has progressively trimmed its stake. All told, the chance that the activists have a decisive impact on the path WTW takes has fallen over time.
Of course, what happens is not just an academic question. As a public company, external capital has the opportunity to try and force either of these outcomes at any point – and the board would be obliged to entertain interest.
According to sources, multiple private equity houses have examined the possibility of mounting bids for WTW post-Aon. However, a combination of the ~$30bn+ check size, the trading multiple, the increasing cost of capital, and questions about the availability of backable leadership inhibited interest.
With the stock trading at ~12x forecast 2023 real, it is difficult to see that the business is hugely undervalued with Hub International’s minority deal attracting a ~16x multiple of adjusted Ebitda, and Truist Insurance ~14x. (Adjusted Ebitda in private broking transactions tends to be 10% or more above a public company comparable number – so the valuation gap is smaller than the headline multiples suggest.)
Break-up
If WTW were to look to break itself up by selling the broking business, there would definitely be competitors interested in buying the ~$3.5bn-revenue unit. It is possible, however, that some with the wherewithal would find themselves in the antitrust cross-hairs – creating execution uncertainty (and perhaps triggering some corporate PTSD).
Platform-less private equity would be a safer bet, and no doubt some of the larger buyout firms would look at such a transaction. Clarke’s arrival increases the chance of this outcome because she would likely be perceived as a backable leader.
WTW could likely sell the broking business at a higher multiple than its own trading multiple, which some may perceive as a one-time boost to shareholder value. But it is hard to know how the market is really valuing the business. Given the lower growth profile of health, wealth, and career businesses – it may prove that WTW would de-rate if it sold the broking operation.
Of course, the board would also have to be happy to sell the long-term upside from retooling broking for a short-term windfall.
Fundamentally, the question for the board on a break-up is whether the current corporate form adds value. Does having health, wealth and career in the same group as broking mean that the sum of the whole is greater than its parts?
Or to express it differently: Has the issue been misguided strategy or flawed execution?
There are differences in business mix, but Aon and Marsh McLennan both suggest that having a broad swathe of capabilities across broking and human capital creates more value when execution is strong. The conglomerate form within this corner of professional services seems to work, and the best companies operating in it have a high degree of conviction on that point.
Aon, in particular, through its longstanding Aon United strategy has driven value for a number of years by knitting its capabilities more closely together for clients, and leveraging a shared services platform.
Under new CEO John Doyle, Marsh McLennan is also putting cohesion between its disparate businesses at the center of its strategy.
Five focus areas for Clarke
Zooming in to the broking business itself, Clarke will have a major job on her hand next year when she arrives even though there has been a degree of bounce back following the Aon turmoil.
Five obvious areas of focus are likely to be on the agenda.
1. Talent
Broking firms do not primarily succeed based on intellectual property, systems, technology, brand, or access to capital. Talent is the overwhelming determinant of success, with the kinds of drivers listed above of much lesser importance.
Winning brokers assemble the best teams. They bring together staff that are smart, technical problem solvers, hard-driving client advocates and tireless salespeople.
Clarke’s number one focus should be hiring high-caliber external talent and ensuring that the best WTW people are deployed in the right places. An early difficult decision will be whether the organization looks to target Marsh staff, including her erstwhile JLT colleagues. It should not be doubted that she would have the draw to move key people.
Regardless of where she chooses to look, the former JLT Global Specialty CEO is likely to prove a talent magnet for the organization. And as she does that, she can be expected to rally staff around a common purpose of serving clients, and find a way to get the most from them.
2. M&A
M&A has been a key lever of value creation in broking over the long term, and a major driver of growth for large public companies like Marsh McLennan, AJ Gallagher, and Brown & Brown, as well as a host of privately owned firms.
Broking firms can execute a high number of deals quickly due to the limited complexity and lack of balance sheet risk. Transactions are sometimes strategic, and offer access to new markets. But they also offer financial benefits including multiple arbitrage on the acquired earnings, and scope to realize synergies.
WTW has been effectively absent from the M&A lists as an acquirer for years, leaving the field entirely to competitors. The group has sealed only three small acquisitions since the Aon deal termination, and has gotten nothing to the line in the last 18 months. This has contributed to it falling behind in the race for growth.
By pretty much any measure, it is no longer right to talk about a Big Three – with WTW behind Gallagher on trailing-12-month revenues, and market cap, and behind Brown & Brown on risk/broking revenues. A big driver of that is M&A.
Allocating capital to broking M&A and figuring out where best to deploy it should be a priority.
3. US growth
North American broking has long been a trouble spot, with the group outpaced by competitors on organic growth and losing share.
There are no public figures for this as the regions are not broken out in WTW’s disclosure, but sources suggest the US has been central to long-run growth challenges. (Overall, its organic growth has been trending closer to peers over the last 12 months.)
Michael Chang, who arrived as head of corporate risk and broking for North America in October last year, has been energetic since arriving.
But it remains to be seen if his work on placement can drive improved yield from the premiums WTW handles, without creating other costs for the organization.
The jury is also out on the reorganization of the business into 12 industry practices. Senior broking sources elsewhere believe that this structure could prove a cost sink, with significant duplication of resource.
We will see whether it survives contact with Clarke’s leadership, or if she chooses to tilt the organization more heavily towards products or regions.
4. Margins
WTW has a margin problem, with a significant negative delta versus peers. Aon is 1000 bps ahead, Marsh McLennan 400 bps ahead, and Gallagher 900 bps ahead as of full-year 2022.
There is no public disclosure on the segmental margins, but according to sources the broking business is a major driver of the weak margins.
The gap flags the need for operational transformation – something which WTW has committed to with investors.
Much of this will be driven at group level, given that where it has been best achieved, it is about the creation of a shared back- and middle-office that can service the entire group.
However, sources have said that there are also issues with effective duplication between WTW’s retail footprint, and its specialty talent base in London. This may be an area that could be targeted to improve efficiency, without hurting client service.
5. Reinsurance broking
As a condition of its $3.25bn+ sale of Willis Re to Gallagher, WTW signed a non-compete preventing it from operating within the treaty reinsurance segment for two years.
That non-compete lapses in Q4. At that point WTW will need to answer the reinsurance broking question (and indeed one would expect it to be under discussion even now).
It is a fiendish question.
Reinsurance broking is a neat complement with retail broking. Broking groups with retail are essentially able to draw rent on their retail flows by securing shares of high-margin outwards business from their key trading partners.
Reinsurance broking also helps retail. Reinsurance broking arms at their best act as R&D hubs and centers of excellence and analytics to enhance the broader offering of the group to non-reinsurance clients. In performing this kind of role, they can also play an important part in breaking down walls within broking groups and creating connectivity.
The question is fiendish not because it is unclear whether WTW would benefit from having a scaled reinsurance broker.
It is fiendish because it is not clear how it could get one.
The segment is effectively post-consolidated following TigerRisk’s $1.6bn sale to Howden last year, and it is unclear what reinsurance broking asset you could buy with more than $50mn of revenues.
If WTW were to choose to build from scratch, even a successful build would take many years to make a difference – and require substantial upfront capital. And it would also have to go up against a slew of rival challengers that are already well into their builds.
The same consolidation block is not as acutely true in the MGA space where WTW exited via the sale of Innovisk, and this may be an obvious area for deals.
Hard to kill a broker
As Clarke looks to address the challenges, she will benefit from how difficult it is to send a broking business into terminal decline.
Brokers are simple cashflow businesses with a lot of annuity income, so unless debt is mismanaged, or there is a major regulatory shock, there is typically time to address issues and rebuild.
As Clarke looks to do that with WTW’s broking arm, she will have lots of advantages she can draw on. These include scale in a business where scale counts, significant goodwill in the market, a near 200-year-old brand, and sister units that are leaders in areas like pension advisory and actuarial services.
She will need to draw on all of those as she looks to get the stalled broking giant moving again.
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