Strife Erupts on Proposed Towers Watson Merger

The $18 billion union is far from a done deal.

Several proxy vote research firms, an activist hedge fund, and Towers Watson itself have faced off in an fractious opinion battle over the consulting giant’s proposed merger with insurance brokerage Willis. 

In one week, shareholders are set to vote on the fate of ‘Willis Towers Watson’: A union that would create the third-largest advisory, brokerage, and financial product firm worldwide. Expert guidance on the $18 billion deal has become more conflicted with each passing day. 

“It is a shame that Institutional Shareholder Services could cause the dissolution of a deal that even it doesn’t dispute should be highly accretive to both sets of stockholders.”

Willis and Tower Watson’s agreed-on merger-of-equals structure would sell Towers at its closing-date stock price plus a $4.87 dividend per share, not a premium as is typical with acquisitions. 

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The two largest shareholder-proxy advisors—Institutional Shareholder Services (ISS) and Glass, Lewis & Co.—ignited debate last week by recommending voters reject the offer. “Although the potential long-term benefits of the deal appear compelling, it is not at all clear that realizing those opportunities necessitates taking a steep discount,” ISS stated in its report. The firm critiqued Towers for negotiating exclusively with Willis as opposed to putting itself in play for other bids. 

Towers shot back the next day. The proxy advisors, it argued, “focus on short-term trading, take a narrow view of relative value contribution, and unduly discount the significant long-term value creation potential of the proposed merger with Willis.” 

“We are pleased ISS recommended that shareholders vote against the value-destructive Willis transaction.” 

Asset manager Driehaus Capital jumped in the fray to back ISS, calling the potential transaction “value destructive.” 

Activist hedge fund ValueAct took the opposite position, accusing ISS of ‘bumpitrage’, or issuing advice in pursuit of a short-term stock bump rather than long-term value. 

“It is a shame that ISS could cause the dissolution of a deal that even it doesn’t dispute should be highly accretive to both sets of stockholders over a multi-year time horizon,” ValueAct—a Towers shareholder—wrote yesterday in an open letter backing the deal. “The suggestion that the Towers Watson board did not do its job in exploring a quick-hit cash premium rings hollow.” 

And yesterday, a full analysis from research firm Proxy Mosaic concluded that Towers investors stand to benefit from a completed union. 

“The merger will create a well-balanced consulting and insurance brokerage company almost roughly split geographically between North America and international business,” the report said. 

Proxy Mosaic acknowledged that the deal may be a “difficult pill for shareholders to swallow” given the lack of market-price premium. Nevertheless, “the long-term value to be realized in this combination is compelling, and that the current Towers Watson management team has the kind of track record of success with integration to warrant a large degree of trust.” 

Towers’ stockholders are scheduled to vote at a special meeting in Miami Beach November 18 at 8am ET. 

Related: Towers Watson to Merge with Willis GroupLSE Buys Russell for $2.7 BillionHow Do You Solve a Problem Like Consulting?

AUM Growth Is Hedge Funds' #1 Goal

Managers have internalized investors' well-documented size bias, EY research shows.

With the competition for assets stronger than ever, hedge funds are diverging from traditional models in hopes of expanding their asset bases.

According to consulting firm EY’s 2015 hedge fund and investor survey, investor appetite in alternative products means hedge funds are facing competition from managers who offer exposure to products not traditionally offered by hedge funds, such as private equity, which 56% of investors said they were either currently invested in or planning on investing in.

At the same time, “the level of AUM [assets under management] necessary to thrive is not only higher than what would have been necessary in the past, but the timeline to achieve these critical thresholds is shorter than ever,” according to EY.

Of hedge funds surveyed, 57% named asset growth their number one strategic priority. In particular, mid-level funds managing between $2 billion and $10 billion most aspired to higher AUM, with 70% saying it was their top goal.

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The second highest priority was talent management, which survey respondents said was a necessary component of asset growth.

“In order to continue our growth, we need to retain and continue to hire top talent,” said one North American respondent. “We’re all competing for the top talent so it boils down to: do they join you or do they join them?”

For hedge funds managing less than $10 billion, the top strategies for attracting assets were accessing new investor bases within existing markets and increasing penetration with existing client types and markets through their current strategies and products.

Larger funds, however, were focusing on growing AUM by becoming a “one stop shop” for investor needs. Their top approaches to growth adding new hedge fund strategies and launching new non-traditional products.

In fact, while 54% of hedge funds managing upwards of $10 billion currently identify as multi-product asset managers, 63% surveyed see themselves offering multiple product types in the next three to five years. Just 23% said they plan to stick with the traditional hedge fund offering.

Smaller funds aspired to more diversified offerings, too. About half of $2 billion to $10 billion firms sell only the standard product, but “they realize taking the leap to a multi-product asset manager is the path forward in a maturing industry,” according to EY. Of hedge funds of this size, 49% plan to become a multi-product asset manager within the next three to five years.

Even funds managing less than $2 billion plan to adapt to the changing industry, but their expectations are “more tempered,” with 58% predicting they will offer some non-traditional products in three to five years, and just 19% reaching for multi-product manager status in that time frame.

So far, survey respondents said overwhelmingly that product diversification has helped their funds grow AUM, increase investor satisfaction, and improve their brand. However, these news products have also had a negative impact on operations and personnel, as well as contributing to lower operating margins.

Also affecting margins were management fees, which fell from the traditional 2% to an average of 1.45%. Hedge funds managing more than $10 billion charged the highest fees, but even for those managers the average fee rate was 1.51%.

This, too, was a result of increased competition, according to EY, with managers forced to be more open to negotiating investment terms if they wanted to secure assets. Of managers surveyed, 60% said they have already offered reduced fees for larger mandates.

EY hedge fundsSource: EY

Related: HF Managers Cautioned to Avoid Herd Mentality & Hedge Funds and the Price of Consistency

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