The Biden administration’s new emphasis on anti-trust enforcement claimed a high-profile trophy with the collapse today of Aon’s deal to acquire Willis Towers Watson—a development that reverberates beyond Aon’s London headquarters and Washington, D.C., to Chicago.
The announcement that Aon and Willis would call off the deal, unveiled in March 2020 just before the pandemic upended commerce around the world, came after the Justice Department sued to block the transaction. Federal anti-trust regulators argued the combination of the world’s second- and third-largest commercial insurance brokerages would hamper competition without far more divestitures from Aon.
Aon CEO Greg Case initially responded by saying the company would battle the feds in court, but ultimately decided it would take too long to settle the issue.
With the decision, Case’s dream of overtaking New York-based Marsh McLennan as the world’s largest insurance brokerage via the tie-up with Willis apparently comes to an end. Aon first approached Willis well over two years ago about a deal. A leak of the talks in early 2019 scuttled his first attempt. He returned a year later with the $30 billion proposed transaction.
“Despite regulatory momentum around the world, including the recent approval of our combination by the European Commission, we reached an impasse with the U.S. Department of Justice,” Case said in a statement. “We are confident that the combination would have accelerated our shared ability to innovate on behalf of clients, but the inability to secure an expedited resolution of the litigation brought us to this point.”
Under the agreement, Aon must pay Willis a $1 billion breakup fee. That amounts to about half of Aon’s net income last year. As recently as 2018, Aon generated just $1.1 billion in net income.
Aon and Willis both are based in London, but both have ties to Chicago. Aon’s footprint here in particular is substantial. Based in Chicago for decades until the tax-motivated headquarters move to London in 2012, Aon employs about 5,000 locally.
The deal would have entailed substantial layoffs around the world to meet cost-cutting targets. How many of those would have taken place in Chicago never was disclosed, but workers here were on guard.
More may be gleaned on July 30 about whether Aon—which under former McKinsey consultant Case has run less ambitious cost-cutting campaigns regularly—will seek to appease Wall Street with a new efficiency initiative when the company reports second-quarter earnings.
In the meantime, Willis announced it would plow its $1 billion windfall into buying back shares. Aon, too, has been an aggressive share repurchaser in recent years, and the $1 billion hit to its cash pile could impede that in the short term.
The Chicago fallout isn’t confined just to Aon and Willis, both of whose names grace two of the tallest skyscrapers in the city (in Willis’ case, the former Sears Tower). Arthur J. Gallagher, the fourth-largest global insurance brokerage, is based in Chicago and was poised to benefit in a transformative way from divestitures Aon and Willis had agreed to in order to win backing from European regulators. Those acquisitions won’t happen, and Gallagher already has raised billions in equity to finance the now-scotched deals.
Little wonder, then, that Gallagher’s stock price was off more than 1 percent in early afternoon trading today. Aon’s rose more than 9 percent—the typical response on Wall Street to an acquirer when an expensive deal falls through. Willis’ stock was down more than 9 percent.
The benefit for Aon may be short-lived, though.
“We suspect there may be intermediate downward pressure on both (Aon and Willis’) stock,” Piper Sandler analyst Paul Newsome wrote today. “Earnings expectations for Aon’s stock incorporate cost-cutting that were related to the (Willis) merger. (Willis’) strategic future is uncertain following the merger failure.”
In the meantime, Aon’s board expressed confidence in Case and his longtime partner at the firm, Chief Financial Officer Christa Davies, by extending their employment contracts to April 2026, according to a Securities & Exchange Commission filing. They both were set to expire in 2023. No changes were made to their compensation arrangements.
Case was set to run the world’s largest insurance brokerage with the completion of the Willis deal. Now he will have to content himself with the nuts and bolts of day-to-day management of what looks to continue to be the industry’s No. 2 player for the foreseeable future—just as Aon has been for decades.
There’s one little-appreciated wild card that all the drama has created, which could have repercussions in the future:
All the deal-making between three of the world’s top four brokerages has led to detailed due diligence, in which each firm has gotten inside peeks at each other’s businesses and talent. An industry known for talent raids and resulting litigation may have to brace for even more of that—and pay its well-compensated top producers even more.