A prolonged slump in the property and casualty market has forced insurance brokers to move away from broking and towards ancillary areas such as pension advice.
Aon on Tuesday confirmed it was considering an all-share transaction with Willis Towers Watson, a combination that would be a surprise. Their combined equity value would exceed $60bn.
But their potential mash-up of businesses — of which bringing together buyers and seller of insurance would be just a fraction — could ultimately lead to a clever transaction structure where these professional services conglomerates are re-assembled into pieces that fit better together.
Willis Towers Watson itself is the creation of a massive deal, the 2016 combination of Willis Group and Towers Watson. Towers Watson specialises in human resource consulting and Willis sought the merger to diversify away from insurance. In the process the new combined company redomiciled to Ireland to lower its tax rate. As a result, half of the group’s business is consulting on things such as staff perks and pensions.
In the past five years, Willis’s shares are up a healthy 62 per cent, ahead of the S&P 500. That still trails Aon’s performance. Its shares have nearly doubled. Without a massive merger, Aon has said it can achieve an organic growth rate in mid-single digits, better than the average for insurance brokers. As such, its forward price to earnings multiple is approaching 20 times, well ahead of Willis Tower Watson’s in the low teens.
Like Willis, Aon itself has diversified and has five different segments. Their concentration in some markets seems problematic when thinking about their own merger. The UK competition regulator recently looked at whether insurance brokers were engaging in anti-competitive behaviour. It has just cleared them of this.
Those two dominate these sectors so it is not clear they could simply join forces without drawing regulatory scepticism. If these companies do find a way to merge, do not expect it to be straightforward.
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