Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

It's an age-old question in finance: which is more beneficial -- a buy-and-hold investment strategy focused on long-term growth, or one seeking more immediate gains?

On Wednesday, shareholders of consulting firm Towers Watson will get to weigh in on the argument when they vote in Miami Beach on its merger of equals with insurance brokerage Willis Group.

The deal boldly robs them of a near-term windfall but promises enhanced profits in the long run. When announced in June, the stock-based transaction valued Towers Watson at $125.13 a share, even though it was trading closer to $138. (The shares ended last week at $127.42 a share, roughly 5 percent above what Willis’s offer equated to as of Friday's close).  

Against the Trend
Towers Watson holders are being asked to accept a discount when others are getting premiums.
Source: Bloomberg

Advocates for and against a "yes" vote have already chimed in, as is typical in situations like this. Surprisingly, proxy advisory firms Glass Lewis & Co. and Institutional Shareholder Services both sided with short-term profits, recommending that shareholders vote against the merger even though it makes sense. Glass Lewis, which said the “strategic rationale underpinning the proposed merger is sound," reckons Towers Watson shareholders should demand improved terms or go it alone. ISS, which noted the long-term benefits of the deal “appear compelling," said the discount is “excessive” -- a fair statement since the average premium on an M&A deal this year is almost 30 percent, according to data compiled by Bloomberg. 

Among those willing to take the chance on a combined Willis Towers Watson is ValueAct Capital Management, both Willis’s second-biggest shareholder with a 10.2 percent stake and the owner of a 0.7 percent stake in Towers Watson. The firm criticized the proxy advisors for encouraging “bumpitrage”  -- or short-term profiteering by pushing for improved deal terms. 

ValueAct obviously doesn’t want Willis to cough up more than it must to seal the deal, but it has a point: If the majority of Towers Watson shareholders are too focused on short-term gains and block the deal, they'll also be standing in the way of future earnings growth driven by a lower tax rate (Willis is domiciled in Ireland), up to $125 million in annual cost savings and revenue growth from cross-selling products and services. 

Investors such as Driehaus Capital Management, which owns around 1.4 percent of Towers Watson, plan to reject the merger unless Willis makes a better offer. (The firm penned six open letters, describing the deal in some of those as “predatory” and “value destructive”). Driehaus believes Towers Watson will thrive if it remains independent, a notion that's supported by the New York-based company's recent quarterly earnings beat, its ninth in a row. Analysts, too, believe Towers can climb 14 percent in the next 12 months without a deal. 

Deal Could Become a Casualty
Comparative stock performance shows Towers Watson shareholders are not impressed.
Source: Bloomberg

Even so, a combined Willis Towers Watson is expected to outpace any growth that Willis and Towers Watson will attain individually and become a stronger rival to diversified insurance-brokers such as Aon and Marsh & McLennan. Factoring in cost and tax synergies, the deal in its current form values Towers at as much as $152 a share, according to Piper Jaffray. Unfortunately, it might not get to the starting line in its current form. 

Luckily, there’s an insurance policy: Willis has the option to sweeten the deal terms if it gets shot down on Wednesday, and an easy way to do it would be to lift the one-time cash dividend that Towers Watson shareholders are set to receive. It just shouldn't have to: sense should trump cents.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net