Aon/Willis Towers Watson: bidder pays steep price for shouldering antitrust risk

Mergers & Acquisitions updates

There was never supposed to be a cash payment. In March 2020, Aon announced that it would acquire rival insurance broker Willis Towers Watson in a deal that valued the target’s equity at roughly $30bn. Willis would simply swap their existing shares for new ones in the combined company. Rather than being paid a large cash premium up front, Willis shareholders would share in the upside as synergies multiplied. 

Alas, there will be no synergies. The US Department of Justice said last month it would sue to block the merger on competition grounds. On Monday, the companies announced that they would drop the deal. Aon will now pay a $1bn “reverse” termination fee to Willis.

As the Biden administration signals a harder line on industry concentration, expect target companies to wrangle equally pricey break-up fees to compensate for the risk of a busted deal. Buyers should ask themselves if an acquisition is worth the risk of the potential cash penalty.

While the $1bn figure seems high in absolute terms, it is roughly in line on a proportional basis with other large break fees, according to data collected by research firm Deal Point Data. For example, AbbVie in 2014 paid $1.6bn to Shire after its tax inversion deal collapsed, roughly 3 per cent of the $53bn equity purchase price. Among recent major deals that have failed, the $4bn or 10 per cent break fee that AT&T paid to T-Mobile in 2011 is the highest as a proportion of the deal price.

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Willis quickly announced that it would allocate the $1bn to share buybacks. Its stock price fell a tenth on Monday, but is still above its level of last March.

Break fees might look like money for nothing. Not quite. Some legal fees will have been incurred already. Jilted targets also now have to explain and justify go-it-alone strategic plans. At least Willis shareholders are not missing out on a large cash premium. The break fee is hardly a substitute for a transaction that they expected to benefit from in higher dividends. But as consolation prizes go, it is a good one. 

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