The two consulting giants announced today that their respective Boards of Directors unanimously approved a definitive agreement under which Towers Perrin and Watson Wyatt will combine in a merger of equals to form the new, publicly listed company called Towers Watson & Co. Based on the closing price of Watson Wyatt common stock on June 26, 2009, the implied equity value of the transaction is approximately $3.5 billion, according to the announcement. Watson Wyatt Chief Executive Officer John Haley will serve the combined company as Chief Executive Officer; Towers Perrin Chief Executive Officer Mark Mactas will serve as President.
Towers Watson, which is expected to have annual revenues in excess of $3 billion, according to the announcement, will benefit from the scale of the combined companies and anticipates approximately $80 million in pretax annual synergies. While “significant savings are expected during the first two years following completion of the transaction, it is anticipated that full realization of synergies will take three years and cost approximately $80 million’, according to the firms. The announcement acknowledged that the new entity will “also have significant non-cash expenses during the first two years following completion of the transaction’. The transaction is expected to be accretive to diluted earnings per share within three years following the consummation of the transaction.
Among the merger benefits highlighted by the firms were that the combined firm would be “stronger than the sum of its parts, positioned for industry leadership long into the future and a more effective competitor that can provide additional services to our existing and prospective clients.’ The new firm will operate within four geographic regions: North America, EMEA (Europe, Middle East and Africa), Asia-Pacific, and Latin America, and will focus its operations on three segments:
- Talent and Rewards, and
- Risk and Financial Services.
According to the announcement, Towers Watson expects to have an annual earnings before interest, taxes, depreciation and amortization (“EBITDA’) margin of 17%+ post-integration. “We expect $80 million potential cost synergies on a year three run rate, with $80 million in expected one-time costs,’ the firms noted in a press release.
“The combination of Towers Perrin and Watson Wyatt into Towers Watson will create one of the world’s leading professional services firms, well positioned for sustained growth and profitability across all geographies and business segments,’ said Haley in announcing the merger. “The combination will further strengthen our core service lines while offering our clients an enhanced portfolio of proven offerings across a range of financial, risk and people management areas. Towers Watson will have tremendous global reach and service breadth to meet the growing needs of the world’s largest multinational corporations. As we provide more value for our clients, we in turn create value for our people and our shareholders.’
Mark Mactas, Chief Executive Officer of Towers Perrin, said in the announcement, “This is an important transaction for our respective organizations that positions us well for a future of accelerated growth and higher levels of profitability. The fit between our firms is excellent, starting with a deep commitment to client service and shared values of integrity, professionalism and respect. Our service lines and geographic strengths are also highly complementary, which creates great opportunities for growth. We couldn’t be more excited about this combination, which will change the landscape of our industry.’
Terms of the Transaction
Under the terms of the agreement, Watson Wyatt shareholders will be entitled to receive fifty percent of the combined company’s shares on a fully diluted basis. Towers Watson shares issued to Watson Wyatt shareholders in the merger will be freely tradable.
Towers Perrin shareholders, who are all active employees of Towers Perrin, plus a group of Towers Perrin employees to be designated to receive certain equity incentive awards, will be entitled to receive fifty percent of the combined company’s shares on a fully diluted basis. Towers Watson shares issued to Towers Perrin shareholders will be restricted shares that become freely tradable over a period of one to four years.
The firms noted that the transaction is subject to approval by each company’s shareholders and the satisfaction of customary closing conditions and regulatory review and approvals, including competition reviews in the U.S. and other countries. Subject to satisfaction of these conditions, the companies anticipate a shareholder vote in the fourth quarter of 2009 and a closing date “as soon as possible thereafter.’