Breakingviews: Aon repeats gaffe with $30 bln Willis deal

Aon is repeating early March 2019 – at least as far as a planned purchase of Willis Towers Watson is concerned. Almost exactly a year ago, investor skepticism quickly torpedoed the insurance broker’s idea of buying Willis. Now Aon has agreed to buy its rival for $30 billion – and it still looks unrewarding to Aon’s owners. Announcing the merger during a market panic over the coronavirus and related oil-price ructions adds insult to injury.

Aon is paying a premium of just over $4 billion, based on Friday’s closing prices – though both stocks were down on Monday, Aon’s by more than 10%, a far steeper drop than the S&P 500 Index. The companies think they can save $800 million in annual costs from combining. Assume the combined firm pays a 15% tax rate, about what Aon paid last year, and the value of these is approaching $7 billion once taxed and capitalized on a conservative multiple of 10 times. Aon shareholders’ 63% share of these would be worth about the same as the premium. In other words, essentially all the added financial value of the merger is going to the owners of Willis.

Moreover, achieving these cost cuts may be difficult. At 4% of combined revenue, the companies are expecting about twice the level of savings as in the deal that created Willis Towers Watson.

The companies hope combining will deliver additional revenue beyond what each could achieve alone. That seems unlikely, as they are the second and third biggest enterprises in their market and offer similar services. Their tax rates also look similar already. And there may be antitrust hurdles to consummating the deal. If he can get over them, at least there’s something in it for Aon Chief Executive Greg Case, who will manage the enlarged company.

As last year, when a deal never made it into final form, investors seem skeptical, especially Aon’s. Asking them to accept such a lackluster deal, and on such a day in the market, seems like repeating a gaffe.

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