Analysts at Keefe, Bruyette & Woods (KBW) have said that a potential business combination between re/insurance brokers Aon and Willis Towers Watson (WTW) is “unlikely but not impossible.”
Speculation about a possible merger deal between the two broking giants was sparked last week after WTW confirmed that it was exploring “strategic alternatives” for Miller, its wholesale unit.
The move comes almost a year after early stage discussions regarding a potential combination between WTW and Aon collapsed.
Commentators have theorised that the Miller sale could be preparing the ground for a bigger mergers & acquisitions (M&A) deal, possibly once again with Aon as the brokers wait out the one-year cooling off period between rounds of negotiation.
But KBW believes that many Aon investors are focused on the continued execution of its current free cash flow growth strategy, and would respond negatively to the near-term re-emergence of earnings adjustments.
Notably, Aon’s shares dropped by 7.8% following the initial news of its interest in WTW, which KBW feels to be a clear indication of how investors would react to a deal.
Additionally, analysts argued that the internal distractions caused by a deal of this size and complexity would limit the ability of both company’s to capitalise on tailwinds in the current market.
These include rising property and casualty (P&C) re/insurance rates, as well as the near term talent and revenue outflow opportunities stemming from MMC’s 2019 acquisition of JLT.
But KBW did acknowledge that Aon CEO Greg Case and CFO Christa Davies have a proven track record of efficiently integrating acquisitions and generating margin expansion and free cash flow growth, potentially enabling value creation in areas where WTW may have disappointed investors.
This skill set could be useful for management any antitrust concerns arising from a potential combination, it added, as a merger would almost certainly require some divestitures to avoid over-concentration of market share.
On this note, KBW’s observations support earlier comments made by analysts at Wells Fargo Securities, who suggested that an acquisition by Aon could require WTW to shed more of its businesses.
In particular, Willis Re was highlighted as a likely candidate to be offloaded, perhaps in a similar way to JLT selling its aviation business to get regulatory approval for the sale to MMC.
Also weighing in favour of a potential acquisition are the benefits to be gained from additional size and scale, which would allow for more sophisticated proprietary solutions and more negotiating power, KBW said.
As a final point, analysts observed that WTW’s current CEO is scheduled to retire at year-end 2020, which will increase the risk of segment head turnover, and hence could represent a reasonable time to consider a sale.
