By Liz Hoffman And Juliet Samuel
When Willis Group Holdings PLC and Towers Watson & Co.
announced plans to form an $18 billion global professional-services
firm, they billed it as a merger of equals. But their investors
don't see it that way.
In the all-stock deal, announced Tuesday, shareholders of
Willis, a European insurance broker, will take 50.1% of the
combined company, and owners of Towers Watson, of Arlington, Va.,
would get 49.9%. Together, they would form Willis Towers Watson, a
global firm with offerings from insurance and reinsurance to
retirement planning and health-care consulting.
Towers Watson shares dropped 8.8% Tuesday when investors
realized what they were actually getting: a package of shares and a
special cash dividend that amounted to $125.13 a share as of
Monday's close, well below the $137.98 closing price of Towers
Watson stock that day.
Shares of Willis, which is smaller than Towers Watson in terms
of market capitalization, rose 3.3%. Barclays PLC analyst Jay Gelb
said the company "appears to be extracting more value from the
transaction than" Towers Watson.
Typically in mergers, the company giving up control is
compensated by receiving more for their shares than they had been
worth. That approach is sometimes true even in deals billed as
mergers of equals; OfficeMax, for example, received a 3.8% premium
in its 2013 merger with Office Depot. Rarely do premiums flow to
the controller, as it will to Willis.
That could prove a stumbling block for the deal, Mr. Gelb wrote
in a note to investors.
"Our sense is the deal could face challenges being approved by
[Towers Watson] shareholders at the current discounted valuation,"
he wrote.
Towers Watson Chief Executive John Haley said the exchange
ratio, which determines how many shares of Willis stock each Towers
Watson investor would get, was set in May, using a 60-day moving
stock-price average showing the two companies more equal in market
capitalization than they were on the eve of the deal. "It wasn't
done on a spot price at a single day," he said on a conference call
Tuesday, where the first analyst question was about the discount.
"We think that was an appropriate way to do it."
Towers Watson shareholders will receive 2.649 shares of Willis
stock plus a one-time cash dividend of $4.87 a share.
Still, the tie-up in many ways appears to be one of relative
peers. Mr. Haley of Towers Watson will run the combined company,
while Willis Chairman James McCann will keep his title and Willis
CEO Dominic Casserley will become deputy CEO. The board will be
split evenly between legacy directors of both companies.
Towers Watson shareholders are getting something else that may
explain the lack of a traditional M&A premium: tax savings.
Willis, with headquarters in London and domiciled since 2010 in
Ireland for tax purposes, has averaged a 23% tax rate over the past
three years, versus 32% for Towers Watson, public filings show. The
new company's blended rate is expected to be about 25%, generating
savings that will be shared with all investors.
"There are several notable benefits secured by Towers that
should force investors to look past the discount," research firm
MKM Partners wrote in an investor note, citing "added capital
flexibility and a much lower tax rate" as perks of the new
company's Irish domicile. The corporate tax rate in Ireland is
lower than in the U.S. and, unlike the U.S., the Irish government
doesn't tax foreign profits.
Taxwise, the deal takes a page from a series of similar
transactions struck in the past year, including Valeant
Pharmaceuticals International Inc.'s purchase of Salix
Pharmaceuticals Ltd. and Endo International PLC's acquisition of
Par Pharmaceutical Holdings Inc. Foreign buyers, like Canada's
Valeant or Ireland's Endo, can apply their more-favorable corporate
tax regime to U.S. businesses, squeezing additional savings.
Executives of both Willis and Towers Watson on Tuesday were
quick to play down the tax benefits, stressing the business
rationale for joining Willis, a 187-year-old insurance brokerage,
with Towers Watson, a big player in human resources and actuarial
consulting.
Mr. Haley said in an interview that a lower tax rate was a
benefit of the deal but said the "strategic nature of the deal was
what drove the deal."
The combination would further diversify Willis beyond insurance
and reinsurance broking and give Towers Watson access to a global
distribution network. The combined company can cross-sell clients,
including many Fortune 1000 companies, on a wider swath of services
and products, from retirement consulting to risk management.
"We don't expect all these Towers Watson relationships to
suddenly become interested" in using Willis as an insurance broker,
"but we do think it can accelerate" Willis's market share in the
U.S., Mr. Casserley said in an interview.
Executives of both companies touted the opportunity to expand
Towers Watson's One Exchange Platform, which lets companies give
their employees a regional choice of health plans. Towers Watson
estimates the product can save companies an average of $1,400 an
employee. Willis had already been buying the system to sell to its
own customers, a relationship that eventually spawned merger talks,
executives of the companies said.
The combination would create a professional-services giant with
39,000 employees spread across 120 countries, revenue of $8.2
billion and earnings before income, taxes, depreciation and
amortization of $1.7 billion a year.
The deal is expected to cut between $100 million and $125
million in annual costs, excluding any tax benefits, the companies
said. Analysts were unimpressed by estimates, which Mr. Haley said
are "probably a little bit low," but he said he would rather exceed
expectations than miss them.
Leslie Scism contributed to this article.
Write to Juliet Samuel at juliet.samuel@wsj.com
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