Reinsurance News

Aon / WTW deal circled by merger arb & event driven hedge funds

26th February 2021 - Author: Steve Evans

The Aon and Willis Towers Watson (WTW) deal, which will be the largest insurance and reinsurance broker merger or acquisition in history, is now attracting significant attention from investors in the merger arbitrage and event driven hedge fund space.

aon-willis-towers-watson-logosJust in the last two weeks, we’ve heard from numerous global investment fund managers wanting to explore what the potential outcomes of this merger deal may be, as well as what opportunities the range of different scenarios could present to investors

In particular, the investors seeking insights into the proposed combination of Aon with Willis Towers Watson (WTW), an acquisition by any other name, come from the special situations and event driven equity focused hedge fund world, especially those focused on merger arbitrage opportunities.

The ramping up of investor and hedge fund interest in the deal appears to have begun around the time that the European Commission stopped the clock on its competition investigation of the Aon and Willis Towers Watson merger.

Also ramping up interest have been the publication of details from investigations by competition authorities in New Zealand and Australia.

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These merger arbitrage and event driven equity focused investors look to buy one side of a merger deal, while shorting the other, to capitalise on the difference and appreciation once the deal is done.

We’re being told by these investors that the spread on this arbitrage opportunity has been moving lately, with some telling us the implied spread is at a level that would normally suggest the deal was at-risk of not going ahead.

So it’s no surprise interest is currently heightened among these kinds of investors and fund managers.

Right now, there remains a significant amount of uncertainty surrounding Aon’s acquisition of WTW and whether competition authorities may impose any restrictions on it, in the form of remedies or divestment, in order for it to be completed.

Executives at insurance and reinsurance broker Aon had previously confirmed, as recently as early February, that they still expected the planned business combination with Willis Towers Watson (WTW) to close in the first half of 2021.

Now that the EC stopped the clock on its investigation into the merger, allowing it more time to analyse information and poll market participants, that timeline seems less certain. As originally the EC process had a deadline attached of May 10th, 2021 to make a decision on the proposed merger.

We now understand from sources that new questionnaires are said to have been sent out by the EC to various large insurance clients, perhaps reinsurance too.

Our sources suggest that these new requests for information are focused on large clients, the kind of $1 billion revenue plus corporate clients the largest brokers have among their key customer base.

It appears the EC is looking for any signs of concern among large corporate buyers of risk transfer, as to whether the merger will reduce competition and give the combined firm any undue pricing power.

As we’ve said before, pricing power, whether Aon gains more of it after consuming Willis Towers Watson, is the real question for competition authorities, as choice is available in general in most regions of the world.

Another discussion we’ve been having with sources and investors is on the subject of divestments.

Obviously there remains a focus on reinsurance broking and whether Willis Re might be divested. But the discussions have moved on as well and now there is a significant focus on regions where the major brokers dominate the marketplace (with areas like Germany, other EU countries and Asian countries said a focus).

The question there, is whether pricing power could be gained in some of these markets and whether regional verticals could become the focus of any forced divestment attempts.

Another area of focus, when it comes to divestment, is the retrocession marketplace, with Aon seen as having a significant share here already.

All of this is peaking the interest of event driven equity investors at hedge fund managers, as well as the merger arbitrage specialist investors of the world.

Another catalyst for investor interest in the Aon and WTW deal has been the recent move by Warren Buffett to take a large stake in rival Marsh & McLennan.

Buffett’s conglomerate Berkshire Hathaway took an almost $500 million stake in Marsh & McLennan recently, which some are speculating may show the so-called Sage of Omaha believes the ultimate winner, from a share price perspective, will be the Marsh broking business, rather than Aon or Willis Towers Watson.

It seems to us that major investors are now seeking to position themselves on the side of the eventual winners from the Aon and WTW deal, or to find the perfect arbitrage between the two of them.

It’s unsurprising to see this interest, given the size of the merger.

One aside, in all our discussions one topic that is often not being considered is the data stores of the biggest insurance and reinsurance brokers and what kind of advantage data is to them.

It’s not just about market share, feet on the ground, or even percentage of premiums brokered in a specific region or line of business.

How much data, on global insurance and reinsurance market transactions or pricing, you have collected, structured, and own, is also a driver of a particularly significant competitive advantage, one that has perhaps been rather overlooked in all these discussions.

Sentiment among the investors circling the Aon and WTW deal seems to be that the merger will eventually go ahead, but with some level of remedy through divestments. Exactly what those are remains to be seen.

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