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Spanner in the works? US lawsuit targets Aon-WTW merger

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The US Department of Justice doesn’t mince words in its lawsuit aimed at blocking Aon’s $30 billion ($40 billion) purchase of rival international broker Willis Towers Watson (WTW).

“Aon’s proposed acquisition of WTW would combine two of the three largest insurance brokers in the world,” it says. “It would eliminate substantial head-to-head competition and likely lead to higher prices and less innovation, harming American businesses and their customers, employees and retirees.”

The two firms have already taken decisions to address global regulatory concerns, offering to sell a suite of businesses including reinsurance broker Willis Re to Arthur J. Gallagher for $US3.57 billion ($4.7 billion), and they reject the US lawsuit’s claims.

Aon and Willis Towers Watson say the Justice Department’s action reflects a lack of understanding of their business, their clients and the marketplaces in which they operate, and argue the merger would drive innovation.

“While this proposed combination was not developed with the pandemic in mind, the impact of the pandemic underscores the need to address similar systemic risks including cyber threats, climate change and the growing health and wealth gap which our combined firm will more capably address,” they say.

“We continue to make material progress with other regulators around the world and remain fully committed to the benefits of our combination.”

Previous major deals that have made it past the regulators have raised the bar for Aon and Willis Towers Watson.

Their proposed deal follows the April 2019 completion of Marsh McLennan’s takeover of JLT. That deal announced in September 2018 gained clearance after the sale of assets including a global aerospace broking business.

Before then, the 2016 merger of Willis Group and Towers Watson vaulted the combined WTW into the “Big Three” of insurance broking, the Justice Department says. It’s now baulking at the prospect of reducing that back down to a “Big Two” including a behemoth.

KPMG Australia Partner Scott Guse says there are more regulatory concerns as a result of fewer players in the market, but whenever global conglomerates seek to merge, there are going to be issues.

“There is a lot of angst from regulators, but these are the normal trials and tribulations that global companies come across when they do want to merge operations around the world,” he tells insuranceNEWS.com.au.

“It gets down to a balancing act. If they get to a stage where the regulator forces them to divest too many of the assets where they were going to get synergies and benefits, then it becomes a futile transaction.”

Aon said after announcing the asset sales to Gallagher that it remained committed to its previous figure of $US800 million ($1.7 billion) of cost synergies, with the combination to still create significant shareholder value.

Equity analyst research reports suggest Aon won’t be in any hurry to drop the plan, and additional asset sales are likely to be on the cards to get the deal through.

Citi says the three options are to offer up more remedies in the areas of concern, to litigate, or to walk away, which could involve a $US1 billion ($1.3 billion) break fee.

Given both companies have reiterated that they are committed to the deal, option three is the least likely, though still possible, while litigation could cause lengthy delays, the Citi research note.

“We feel the more likely outcome is additional divestitures in the two main areas of concern,” it says. “While it is difficult to know what level of divestitures would be too much to make the deal worth it, to us, it is less about the revenues and more about any potential capabilities that would be lost that are critical to the future benefits of the combination.”

GlobalData Insurance Analyst Jazmin Chong says the combination of the corporate capabilities of the two firms would bridge operational gaps and deliver better outcomes for clients.

Aon has predominantly focused on data and analytics capabilities, increasing hiring in areas around cloud capabilities, personalisation and big data, while the Willis Towers Watson corporate strategy has focused on partnerships outsourcing technological capabilities.

“The Justice Department argues that the combination of assets would result in higher prices and reduce innovation for US businesses,” Ms Chong says. “However, Aon and WTW’s merger would allow for a combination of complementary solutions, capabilities and skillsets that would better assist consumers.”

The proposed deal was announced in March last year, and initially flagged for closure in the first-half of this year. That was revised after the Gallagher announcement to “as soon as possible during the third quarter”. Much longer delays could increase the risk the companies’ normal business focus might slip and cause shareholder disquiet.

In rejecting the deal, the Justice Department has at least given a highly positive review of the firms’ capabilities, along with those offered to US clients by Marsh McLennan.

“Other broking firms do not offer large customers the same quality and combination of services that the Big Three currently deliver: extensive global networks of offices, sophisticated data and analytics, a breadth of knowledge across multiple types of employee benefits and risk management strategies, strong reputations, and depth of personnel with specialised expertise,” it says.

Around the world, insurers, clients, rivals and people within Aon and Willis Towers Watson are awaiting the next moves.