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Aon has know-how to make Willis deal work, analysts say

Aon PLC's management and merger experience should put it on course to efficiently integrate Willis Towers Watson PLC and execute the largest insurance brokerage deal in history, according to sell-side analysts that cover the companies.

The planned merger's $29.93 billion transaction value is nearly 6x the size of the next-largest brokerage deal the combination of Marsh & McLennan Cos. Inc. and Jardine Lloyd Thompson Group Ltd., according to S&P Global Market Intelligence data.

The $800 million Aon has forecast in projected cost savings from merging the two giants is a reliable figure given its takeout history, said Piper Sandler analyst Paul Newsome.

"Aon has a pretty good track record getting cost cuts, so I suspect those numbers will turn out to be accurate," Newsome said in an interview. The breadth and scale of the two companies' large account commercial businesses would give them considerable global reach as one company, he added.

Aon was apparently determined to get a deal done after it was announced around this time last year that the two were engaged in merger talks. A day after that news broke, however, Aon said exploratory discussions had ended with no deal. The March 9 announcement came days after the expiration, under Irish law, of the time that needed to elapse before another deal could be made, KBW analyst Meyer Shields noted.

Aon has not provided a lot of details of how the merger will work, but the deal is under Irish disclosure restrictions, and Aon has been much better at planning and executing mergers than communicating the nuts and bolts of them, Shields said.

"I'm completely confident in the ability to meet or exceed their expense savings target, and I understand their disclosure options are limited right now," he said.

Shields was surprised by the timing though. Aside from the historic market selloff that coincided with the announcement, the commercial insurance sector is in a rising premium price environment, which makes it an important performance time for brokers trying to secure reasonable premium rates for clients, the KBW analyst said. A big and complex deal in the space also offers an opportunity for competitors to make moves while Aon and Willis are distracted by integration, Shields said.

The combination of two brokerage giants into what would be the world's largest, by revenue, is expected to attract the close scrutiny of regulators in many countries. Regulators are likely to take a very granular approach to making sure the tie-up does not produce anti-competitive concentration, as was the case with the Marsh and JLT agreement. Jardine Lloyd Thompson sold its aerospace business conditioned upon the closing of its merger with Marsh.

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The size of Aon and Willis and the number of regulators who must approve the deal make it inevitable that there will be some area of business that is deemed to be ruled as having unacceptable market dominance with a merger, Shields said. But the industry is so fragmented overall there will likely not be an obstacle that prevents the deal going through in the end, he said.

Following the massive equity market nosedive the day of the deal announcement, Wells Fargo analyst Elyse Greenspan reiterated her "overweight" call on both companies' shares because of their resulting stock weakness, and because their merger promises to be "highly accretive," with numbers better than executives are projecting. Arthur J. Gallagher & Co. might find itself in position to pick up a valuable property from another deal-related divestment just as it benefited from the JLT and Marsh tie-up, Greenspan added in a March 9 research note to clients.

William Blair's Adam Klauber is also optimistic about what Aon would be able to achieve with a leadership position in scale, even when taking into account the possibility of some divestitures.

"These risks appear to be manageable," Klauber wrote in a March 9 note. "Bottom line, we believe the combined entity would be a stock to own."