Aon chief executive Greg Case must be cursing his luck after his second attempt at an acquisition of Willis Towers Watson landed in the middle of a market meltdown, exactly one year after the first attempt was scuppered by a leak.

The announcement of the acquisition on March 6 was followed by the worst day for US stocks since the global financial crisis, further complicating an already challenging deal as shares on the S&P 500 fell 8% in response to an oil price shock and escalating fears about the coronavirus.

“The deal would create the world’s biggest broker, with annual revenues of roughly US$20 billion.”

Aon fared even worse than that, collapsing by an eye-watering 17% in a single day — and it hasn’t improved since then, with shareholders seemingly sceptical about the likelihood of regulatory approval for a merger of the world’s second and third biggest brokers. But some analysts say investors are simply being cautious.

“While this was not a good day to announce a deal, we believe the market is taking a wait-and-see approach,” said Elyse Greenspan, an analyst at Wells Fargo. “The numbers look good to us.”

The deal would create the world’s biggest broker, with annual revenues of roughly US$20 billion, and Aon says the combination would create an additional US$10 billion of value for shareholders and US$800 million of long-term projected cost savings.

Despite integration and retention costs of US$1.8 billion, Aon is still projecting mid-single digit or greater organic revenue growth during the long term. And Greenspan says that the projected cost savings of 11.5% are probably conservative given that Marsh is targeting savings of more than 22% from its acquisition of JLT and that the industry average is more like 14%. Aon’s own acquisitions of Benfield and Hewitt also both called for higher expense savings.

Client needs
Case has stressed that the motivation for the deal is to address “unmet client needs” rather than simply pursuing size for its own sake, but competition authorities may take a different view as to whether customers stand to benefit from the merger.

“We would not be surprised to learn that regulators have concerns around the concentrations of business posed by an Aon and Willis Towers combination,” according to Phil Stefano, an analyst at Deutsche Bank.

For its part, the company says it is confident of winning approvals during the next year or so. “Conversations with investors last week have noted some level of scepticism in this comfort, and we think that concerns are not unwarranted,” said Stefano.

Indeed, Aon will almost certainly require some significant disposals to win approvals. Willis Re is expected to be one such sale. Reinsurance broking is almost entirely dominated by the top three players — Aon, Guy Carpenter and Willis Re — so regulators will look dimly on a tie-up between any of them.

Willis’s wholesale business is another candidate to be sold given Aon’s disposal of its own wholesale unit, Swett & Crawford, in 2005.

Independent brokers such as Arthur J Gallagher, which acquired JLT’s aviation business as a result of its acquisition by Marsh, will be eyeing opportunities to pick up some of the crumbs of the breakup, but one broker at a smaller firm noted that this deal is getting much less attention than Marsh-JLT.

“It’s so large that it’s not going to have a massive effect on the rest of us,” they said. “The acquisition of JLT generated lots of attention but there’s been a bit of a shrug of the shoulders with this one.”

Further concentration of the market will clearly have some effect on clients and may result in accounts moving to the independent brokers, but Stefano notes that Aon and Willis Towers Watson’s core primary insurance brokerage businesses have limited overlap.

“We have typically categorised Aon as a global insurance broker and Willis Towers as a mid- to large-market broker serving clients internationally,” he said.

Experience
While M&A deals often fail to deliver on management’s promises, Aon has a strong track record of executing both acquisitions and disposals. Most analysts are sceptical that the integration of Willis Towers Watson will deliver benefits as quickly as Aon claims, but the consensus is that it will deliver in the long run and put Aon on a level footing with Marsh after its acquisition of JLT.

The deal will have significant effects in Asia, where both companies have large footprints. Aon has offices in China, Hong Kong, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan and Vietnam, while Willis Towers Watson has offices in all those markets, plus Macau, Sri Lanka and Thailand.

Of course, getting the deal done in the middle of a global pandemic may prove challenging — and even foolhardy. The terms specifically exclude Covid-19 as a potential deal-breaker under the “material adverse effects” provisions, but it remains to be seen whether pushing ahead during a period of such uncertainty is wise. Only time will tell.