Competitor Sees Opportunities In Towers Watson Merger

NU Online News Service, June 29, 2:54 p.m. EDT

The $3.5 billion stock merger deal announced yesterday between consulting giants Towers, Perrin, Forster & Crosby Inc. and Watson Wyatt Worldwide Inc. was followed by a drop in Watson Wyatt stock price today.

In early trading on the New York Stock Exchange, Watson Wyatt, which closed Friday at $41.18, was down more than $3 per share, and a smaller global competitor, EMB, said changes involved in the consolidation should work to its advantage.

The combined firms, Towers Perrin in Stamford, Conn. and Watson Wyatt in Arlington, Va., will be known as Towers Watson & Co., the companies said, explaining that they expect the arrangement will create a profitable organization positioned for growth with a broader portfolio and wider geographic footprint.

Together the firms have 14,000 employees.

Watson Wyatt Chief Executive Officer John Haley will serve as CEO for the combined company and Towers Perrin CEO Mark Mactas will serve as president, their statement said.

Mr. Haley said the combination "will further strengthen our core service lines while offering our clients an enhanced portfolio of proven offerings across a range of financial, risk and people management areas."

He added that the merged businesses will have "tremendous global reach and service breadth."

Mr. Mactas said, "The fit between our firms is excellent, starting with a deep commitment to client service and shared values of integrity, professionalism and respect. Our service lines and geographic strengths are also highly complementary, which creates great opportunities for growth."

It was explained that Towers Watson foresees significant non-cash expenses during the first two years following completion of the transaction. The firms estimated that Towers Watson will have annual revenues in excess of $3 billion and that benefits of scale will bring $80 million in pretax annual synergies.

Towers Watson said that while significant savings are expected during the first two years following completion of the transaction, full realization of synergies will take three years and the transaction will generate $80 million in one-time costs.

No mention was made of any staff reductions, and Towers Watson said that "for our people, there will be an expanded set of career opportunities."

However, Raj Ahuja, a partner in the London-based EMB actuarial consultancy which specializes in the property and casualty insurance sector, foresees that the shakedown from the merger will inevitably lead to departures of staff.

"Normally a business merger of this substantial size comes with bedding in" issues, he said, and often "talented entrepreneurial individuals may decide to leave.

EMB is an entrepreneurial firm positioned to take advantage of this, he said.

Additionally, Mr. Ahuja said he expects there will be impact on clients, who may want to review their consulting arrangements in view of the change.

He said before the merger announcement, there had been rumors the two firms had been "under some pressure." Right now he said some of the biggest consultants in the management, accounting and actuarial sectors have "been hit fairly hard" by the global economic downturn.

His firm, he said, has been less impacted because it is very specialized. "When you have a specialist firm you can ride it out."

Towers Perrin and Watson Wyatt said they have formed the Jupiter Saturn Holding Company, which will file a registration statement with the Securities and Exchange Commission.

They said Towers Watson will operate within four geographic regions: North America, EMEA (Europe, Middle East and Africa), Asia-Pacific and Latin America and will focus operations on three segments: benefits, talent and rewards, and risk and financial services.

Under the terms of the agreement, Watson Wyatt shareholders will be entitled to receive 50 percent of the combined company's shares, and Towers Perrin shareholders, who are all active employees of Towers Perrin, plus a group of Towers Perrin employees, will be entitled to receive 50 percent of the combined company's shares.

The companies said they anticipate a shareholder vote in the fourth quarter of this year and a closing date as soon as possible thereafter.

Towers Perrin is active in risk and capital management, insurance and reinsurance intermediary services, and actuarial consulting and operates in 26 countries.

Watson Wyatt has a focus on employee benefit programs; attraction, retention and reward strategies; investment strategy advice for pension plan sponsors and other institutions and financial advice to insurance and financial services companies; and delivering related technology, outsourcing and data services. The company has business operations in 34 countries.