A few weeks after my recent blog post http://www.jamesberkeley.com/business-transformation/the-best-re-inventor-award low and behold Willis and Towers Watson surprise the market this morning. Occasionally you see a deal announced and your first reaction is to re-read the headline making sure what you think you have read is in fact true. Uhm, a “merger of equals”, really?
On the surface the logic would be obvious, Willis’s immediate competitors, AON and Marsh both own substantial professional services firms, Hewitt and Oliver Wyman. The future is largely being shaped by high-value advisory services and low-cost transactional broking and administrative services. That is where the easy comparisons stop.
Oliver Wyman largely operates as a separate “silo” with its’ own brand focus, leadership, culture and resources inside MMC. Collaboration is limited to a small number of “joint” client assignments.
Hewitt has been absorbed more comprehensively into AON’s brand offering, leadership and culture. The healthcare consulting has largely been transferred to AON’s transactional healthcare broking business. The Hewitt outsourcing business has undergone extensive changes. What exists of “Old Hewitt” today is largely a talent, rewards, retirement and investment consulting business.
Willis and Towers Watson had the advantage of getting know each other last year in the due diligence phase of the sale of Towers Watson’s reinsurance broking business (ultimately sold to JLT). At the time, JLT trumpeted a future collaboration with Towers Watson. Are we to presume that the JLT/TW collaboration has really proved underwhelming or were there hidden attractions for a Willis/TW merger that few in the public domain spotted? While surely welcome, the mention that ValueCapital, Willis’s activist shareholder, is supportive of the transaction, could be interpreted to mean that Willis was under pressure to consummate a deal with organic growth prospects hardly setting the pulse racing?
The Challenges Ahead
A “merger of equals” is the hardest type of deal to pull off. The first requirement to a successful merger is everybody is open to change. Yet both firms would be characterised by conservative leadership teams and cultures that more often than not have rejected change or accepted it with some reluctance, particularly in the era of Joe Plumeri.
Here are some fundamental questions that investors and analysts need to ask:
- Would Willis Towers Watson be willing to abandon, for example, default labels such as investment consultant, treaty broker and political risk broker? The world is looking for expertise, it is not looking for a client issue to be wrapped in a broking, consulting or investment solution with the inevitable internal competition that does nothing to help the client. Would they be willing to rip up widely held beliefs about fee-setting (scrapping unethical hourly billed fees, a relic of audit firms) or contingent commissions?
- What do the people within the new firm need to thrive? (very light on detail)
- What are the benefits of this union to the customer? (very light in today’s announcement)
- Do the leaders and people within each of the businesses truly believe in those benefits? (Fostering compliance or commitment to the “cause”)
- Do they have people with the skills and volition in the real world to leverage Willis’s global distribution platform or articulate TW’s consulting proposition in the cherished mid-market? Are we going to see a TW expert called in by a Willis broker and vice-versa? (The unwelcome legacy of Willis’s foray into the US – HRH acquisition – has been a high dependency on the local broker’s trusting relationship and very rich producer incentive plans that do little for margin improvement)
- To what extent is each firm’s current structure fundamental to the new firm’s profitable growth and success? (Abandon existing structure or selective tinkering. For example, TW’s prized asset Liazon is dependent on 640 indepdendent brokers who cannot reasonably expect to standby and hand opportunities to a competitor)
My experience and observation is that the combined firm will have some of the brightest and best people working in their respective fields (reinsurance, political/credit risk, capital markets, insurance consulting). They have thrived because they have had strong leaders willing to cut through the institutional bureaucracy and it has been in their self-interest to do so. On top of the Miller-Willis liaison, this is a high-risk foray and investors would be wise to ask the right questions of senior management.
As a footnote, the departure of Steve Hearn, Willis Deputy CEO, yesterday is incidental to the firm’s announcement today. It almost certainly has more to do with Hearn returning to his passion (wholesale broking) in a business where he can have a greater impact on its’ future.
© James Berkeley 2015. All Rights Reserved.