June 29, 2009 / 7:14 PM / 10 years ago

Towers-Watson Wyatt merger may trigger further takeouts

BANGALORE (Reuters) - The $3.5 billion merger of human resources consulting firms Towers Perrin Forster & Crosby and Watson Wyatt Worldwide WW.N could lead to further acquisitions in a sector faced with slowing growth in a down economy.

Companies like Watson Wyatt and rivals Hewitt Associates Inc HEW.N and Mercer, a unit of Marsh & McLennan Cos (MMC.N), are under pressure as clients defer projects or cancel services they consider non-essential, such as talent and organizational consulting and communications.

Some analysts believe firms like Mercer and insurance broker Aon Corp AOC.N, which also has an HR consultancy segment, could be on the prowl as they look to increase their market share.

“Given the high profile of this deal, we think investors will look to answer ‘who’s next?’,” JP Morgan Securities analyst Tien-Tsin Huang said in a note.

The Towers-Watson merger will make the combined entity the world’s largest human resources consultancy, displacing Mercer at the top and leaving Hewitt a distant No. 3 in a highly fragmented market.

“Hewitt could be an acquisition candidate given its strong benefits outsourcing platform, particularly since it has stabilized most of the human resources business process outsourcing business, though that business still loses money,” Stifel Nicolaus analyst Shlomo Rosenbaum said.

Hewitt was not immediately available for comment.

Aon or Mercer could be looking for additional acquisitions in order to bolster their HR consultancy offerings, he added.

Mercer, the human resources and related financial services consulting arm of Marsh & McLennan, employs about 18,000 people.

Hewitt has been posting better-than-expected results for the past few quarters, helped by growth at its benefits segment and narrower losses at its human resources business process outsourcing business.

However, the prolonged recession is taking a toll on the company’s benefits outsourcing segment, which accounts for almost half its revenue.

Not all analysts were convinced that more consolidation was in the cards.

“This is a unique kind of circumstance,” Todd Van Fleet of First Analysis Securities said. “Towers’ parent folks perhaps wanted some liquidity for their ownership position in their organization. Watson Wyatt saw an opportunity where in a downturn you make a move that might not have ordinarily been made in different economic times.”

Shares of Watson Wyatt tumbled as much as 11 percent to $36.70 on Monday as investors feared that integration and deal costs would likely hurt earnings.

Hewitt was up 1 percent to $30.01 in afternoon trade.


“We believe the deal provides Hewitt with incremental opportunities to pick up assets that may need to be sold for anticompetitive reasons,” Citigroup analyst Ashwin Shirvaikar said.

Analysts also said integration issues could lead to competitors like Hewitt, Aon and Mercer taking some business on the fringes in the near term.

Hewitt and others could also gain from an exodus of clients from Towers-Watson to others in the industry.

“Any change in account coverage increases the likelihood that clients would consider making a change to their relationships; this would be good for Hewitt and other HR consulting providers,” JP Morgan’s Huang said.

The Towers-Watson deal will create a combined company with annual revenue of more than $3 billion and a workforce of about 14,000.

Hewitt has annual revenue of $3.23 billion with a workforce of more than 23,000.

Reporting by Saumyadeb Chakrabarty, Bhaswati Mukhopadhyay and Dhanya Ann Thoppil; Editing by Mike Miller

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