Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Legal action casts doubt on Aon-WTW merger
The long-awaited mega-merger between two global financial services giants, Aon and Willis Towers Watson, has hit a major snag as the US Department of Justice moved to block the transaction.
In a statement last week (June 16), the Department of Justice (DOJ) says it had “filed a civil antitrust lawsuit today to block Aon’s [US]$30 billion proposed acquisition of Willis Towers Watson (WTW)”, citing anti-competitive risks of combining the two already oligopolistic firms.
“As alleged in the complaint, Aon and Wills Towers Watson operate ‘in an oligopoly’ and ‘will have even more [leverage] when [the] Willis deal is closed’,” the DOJ release says. “If permitted to merge, Aon and Willis Towers Watson could use their increased leverage to raise prices and reduce the quality of products relied on by thousands of American businesses – and their customers, employees, and retirees.”
Aon and WTW formally launched the merger process over a year ago in a bid to unite two of the ‘big three’ global reinsurance brokers – competing with Marsh McLennan (owner of Mercer). However, both Aon and WTW run diverse operations including in retirement planning and investment services across the world with branches in Australia and NZ.
Given the global reach, the two firms required approval from regulators in multiple jurisdictions for the deal to go ahead with a decision also pending in Europe. The European Commission was slated to rule on the merger on July 12.
Aon and WTW have sold a number of subsidiaries in recent months to meet regulatory concerns. Most recently, Aon hived off its US retirement business to Aquiline, and the Retiree Health Exchange to Alight for total proceeds of US$1.4 billion. In May Aon also agreed to sell its German pensions businesses to London-based retirement investment firm Lane Clark & Peacock.
Meanwhile, WTW offloaded China and Hong Kong reinsurance and other assets valued at US$3.75 billion to Arthur J Gallagher & Co.
According to media reports, the European regulator was seeking the sale of the WTW reinsurance business prior to approving the sale. But the US legal action casts much doubt on the merger time-table, which was originally expected to close in the first half of this year.
Merrick Garland, the US Attorney General, said in the DOJ statement: “Today’s action demonstrates the Justice Department’s commitment to stopping harmful consolidation and preserving competition that directly and indirectly benefits Americans across the country.”
Garland said: “American companies and consumers rely on competition between Aon and Willis Towers Watson to lower prices for crucial services, such as health and retirement benefits consulting. Allowing Aon and Willis Towers Watson to merge would reduce that vital competition and leave American customers with fewer choices, higher prices, and lower quality services.”
In a joint release, Aon and WTW disputed the US DOJ claims, suggesting the merger was even more urgent in light of the COVID-19 crisis.
“We disagree with the US Department of Justice’s action, which reflects a lack of understanding of our business, the clients we serve and the marketplaces in which we operate.
“Aon and Willis Towers Watson operate across broad, competitive areas of the economy and our proposed combination will accelerate innovation on behalf of clients creating more choice in an already dynamic and competitive marketplace,” the release says.
“While this proposed combination was not developed with the pandemic in mind, the impact of the pandemic underscores the need to address similar systemic risks including cyber threats, climate change and the growing health and wealth gap which our combined firm will more capably address.
“We continue to make material progress with other regulators around the world and remain fully committed to the benefits of our combination.”
Aon and WTW are both incorporated in Ireland and headquartered in London with respective annual revenues in 2020 of more than US$11 billion and US$9 billion.
In Australia, Aon’s main business is insurance broking, while the asset consulting and implemented multi-manager and asset allocation offerings represent an important part of WTW’s local operation.
