Aon and Willis Towers Watson $30bn Merger collapse

Author: Kevin Holder
In: Article Published: Wednesday 28 July 2021

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Two of the world's largest insurance brokers, Aon and Willis Towers Watson, both incorporated in Ireland and headquartered in London had sought to merge to create the world's largest broker in a deal worth $30 billion. Aon has 50,000 employees, offices in 120 countries including 100 in the US, and reported revenues of over $11 billion in 2020. It is listed on the New York Stock Exchange. It offers services to companies in commercial risk brokerage, reinsurance brokerage as well as retirement, health and welfare consulting and administration services. Willis Towers Watson has 45,000 employees, offices in 80 countries (the majority of which are in the US), and reported revenues of over $9 billion. It is listed on NASDAQ Global Select Market and offers services to companies in commercial risk brokerage, reinsurance brokerage as well as retirement, health and welfare consulting administration services.

EU Competition Proceedings

The EU were notified of the proposed merger on the 16th November 2020 in accordance with the EC Merger Regulations. The EU Commission raised preliminary concerns "in relation to the supply of commercial brokerage services especially to large multi-national customers, who depend on brokers with a high level of expertise and a global presence." It was particularly concerned that competition might in particular be reduced in respect of:

  • brokerage services to large multi-national customers in the risk classes Property & Casualty, Financial and Professional services, Credit and Political risk, Cyber and Marine;
  • Brokerage services to customers of all sizes for Space and Aerospace manufacturing risks as well as in a few additional risk classes in specific national markets. 

It was considered that "Aon and Willis Towers Watson are two of the very few brokers that are able to provide these services on a multi-national scale."

The Commission was also concerned regarding:

  • The provision of commercial risk brokerage services to large multinational customers based in Europe. Aon and WTW are, along with Marsh, known as the “Big Three” of the brokerage industry. The Commission considers that only a limited number of brokers with a credible presence in Europe have the necessary capability to handle large and complex risks of such customers and a suitable network to provide services internationally. The merger would have hampered competition in particular in the risk classes Property & Casualty, Financial and Professional (FinPro) services and Cyber. Furthermore, irrespective of the customers' size, the Commission had concerns relating to commercial risk brokerage services to customers for Space and Aerospace manufacturing risks, as well as regarding national markets in the Netherlands and Spain.
  • The provision of treaty and facultative reinsurance brokerage services. The Commission had concerns that the merger would have reduced choice for insurance companies since Aon and WTW are two of the three leading worldwide reinsurance brokers.
  • The provision of pension administration services to companies in relation to pension schemes offered to their employees for the market in Germany.

The Commission opened an in-depth investigation on 21st December 2020.  To address the Commission's concerns, Aon offered "a substantial remedy package" including the following commitments 

To divest to Gallagher: 

  • Willis Towers Watson's entire commercial risk brokerage country organisations in France, Germany, Spain and the Netherlands; 
  • Willis Towers Watson's Cyber risk brokerage business in the UK; 
  • A substantial set of additional customer contracts and personnel in a number of EEA countries and internationally; 
  • Willis Towers Watson's entire brokerage business for the risk classes Space and Aerospace manufacturing; 
  • Willis Towers Watson's entire global treaty reinsurance (Willis Re) and facultative reinsurance (Global Fac) brokerage organisation.

To divest to a suitable purchaser:

  • Aon's entire German retirement benefits consulting and pension administration businesses, as well as Aon's German investment solutions business.

It was determined that Arthur J Gallagher was the next closest competitor to the "Big Three" and was thus the most suitable purchaser of the commercial risk and reinsurance divestment business. It was considered that if the major divestitures outlined above were made to Arthur J Gallagher, then the proposed merger between Aon and Willis Towers Watson would no longer raise competition concerns. 

Accordingly, on the 9th July 2021, the European Commission approved the merger based upon Aon's commitments. 

South African Competition Proceedings

The Competition Commission of South Africa (CSSA) also had concerns that the merger would result in "a substantial lessening and/or prevention of competition in the market for the provision of reinsurance broking services in South Africa", requiring a number of divestitures to be made. The CSSA also asked that WTW divest its entire global reinsurance broking business dedicated to treaty and facultative reinsurance to a third party. It was considered that this was met by the agreement by WTW to sell its "Willis Re" global reinsurance business (excluding operations in mainland China and Hong Kong), its Global cedent facultative reinsurance (excluding China and Hong Kong), and a number of other businesses to Gallagher for $3.57 billion. The CSSA considered that the proposed divestitures would "completely remove the overlaps between activities of the merging parties in relation to the provision of reinsurance broking and short-term insurance broking services in South Africa and was likely to create a credible third competitor, thus restoring competition in both markets." 

Australian Competition Proceedings

The Australian Competition & Consumer Commission (ACCC) also reaised a number of significant concerns about the merger "that the combination of Aon and WTW will remove a significant competitive constraint from the markets for commercial risk broking to large customers or those with more complex and/or high-value insurance premiums; reinsurance broking; and employee benefits broking in Australia. The ACCC was concerned that niche commercial risk insurance lines such as financial and professional, cyber, marine, and construction would be particularly affected along with the supply of reinsurance and advisory services, especially reinsurance covering all current and future policies. As the Commissioner stated:

Reinsurance is vital for the Australian economy as it enables insurers to continue to write new insurance policies. The ACCC is concerned that the proposed merger will reduce insurers’ choice of reinsurance brokers in an already concentrated market. This could lead to price increases or reduced service levels for customers, including the ability to access sufficient reinsurance capacity. Reducing the number of brokers in these already concentrated markets, increases the potential for the remaining brokers to align their pricing and strategies. Large customers lack alternatives to the three major brokers and the bargaining power of large customers is low, given their inability to bypass brokers and (as discussed above) smaller brokers are not capable of servicing large customers to the same extent as Aon, WTW and Marsh. The ACCC’s investigation has indicated that tender or contract renewal processes are likely to be less competitive after the proposed merger because of the lack of viable alternatives. In addition to brokerage cost increases, customers have raised concerns that service and quality of the offering will decline, including day-to-day servicing (including claims and crisis management). These concerns are potentially significant: the ACCC’s investigation has indicated that brokers are likely to compete more on quality of service than on brokerage price. Market participants view Aon, WTW and Marsh as the only reinsurance brokers with the expertise, data, analytical, and modelling capabilities and global reach to meet the requirements of insurers in Australia. Other reinsurance brokers (either in Australia or overseas) were not viewed as adequate alternatives.

The ACCC suspended in review on 23rd April 2020 whilst awaiting further submissions from the merger parties. Aon has today withdrawn its request for merger clearance by the ACCC

USA Competition Proceedings 

In June, the US Department of Justice filed an antitrust lawsuit in the US District Court for the District of Columbia, claiming that the proposed merger would "threaten to eliminate competition, raise prices, and reduce innovation for American businesses, employers and unions that rely upon these important services." The US Attorney General claimed the merge would:

reduce that vital competition and leave American customers with fewer choices, higher prices, and lower quality services. If permitted to merge, Aon and Willis Towers Watson could use their increased leverage to raise prices and reduce the quality of products relied on by thousands of American businesses — and their customers, employees, and retirees.

The DoJ considered that proposed divestitures would be "inadequate to protect consumers in the United States." 

The Merger Collapse

Aon initially claimed that the DoJ's actions reflected "a lack of understanding of our business, the clients we serve and the marketplaces in which we operate" and reaffirmed a commitment to merging, but on 26th July, Aon CEO Greg Case announced that despite "regulatory momentum around the world," "the impasse with the DoJ" meant that the proposed merger was being terminated. 

As a result of the termination, Aon is required to pay a $1 billion termination fee to Willis. Presumably Willis will not wish to pursue its $3.5 billion divestiture agreement with Gallagher, but it is unclear what the financial implication of not doing so will be. 

It is interesting that despite prolonged negotiations with regulators around the world, including the EU, and Aon's ability to overcome substantial objections by agreeing substantial divestitures which would have in the view of both the EU and South Africa's CSSA completed removed overlaps between Aon and Willis and greatly augmented Gallagher as a potential competitor, the US DoJ was not satisfied, and its opposition ultimately foiled a $30 billion merger between two corporate giants. 

On the face of matters: Aon, Willis and Gallagher have all been adversely affected by the collapse of the merger, but the news will no doubt be pleasantly received by the US based Marsh McLennan (which incorporates Marsh, Guy Carpenter, Mercer, and Oliver Wyman) who retain their title as the world's largest insurance broker. 

KEVIN HOLDER © 2021

BARRISTER

33 BEDFORD ROW

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.