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Mixed Reviews Given to Merger
The economic situation was seen as underlying the surprise merger announcement by Towers Perrin and Watson Wyatt earlier this week. While the potential exists for success -- and these two behemoth HR consultancies do offer some synergies -- the M&A landscape is littered with failures.
Early this week, when HR consulting giants Towers Perrin and Watson Wyatt Worldwide Inc. unveiled their intention to merge, the announcement had two contrasting aspects. On one hand, the mega-merger of two behemoths is about as earth-shattering as it gets in the ever-growing HR consolidation world. On the other hand, news of the powerful engagement seemingly came out of nowhere, without a hint or a whisper. "We had our annual conference recently, and there wasn't even a word. That is amazing," says Ryan Johnson, vice president of public affairs at WorldatWork, the global human resource association in Scottsdale, Ariz. "Clearly, this is a union necessitated by today's dire economic conditions." Johnson, who also blogs on the WorldatWork site, wonders whether this is the first and only merger of firms in the HR consulting business -- or the first of many in this difficult economic environment. Arte Nathan, who has held a number of HR executive and consulting posts in his career, including as the top HR leader of the Wynn casino organization, says that, while the Towers Perrin-Watson Wyatt merger is stunning -- and holds much potential for the firm and its clients -- it's not all that surprising. "In this economy, there's no merger that is a surprise anymore," says Nathan, who was just named president and chief operating officer at Strategic Development Worldwide, a business and HR consulting boutique firm based in San Diego. "The two firms have lot of very good overlapping business. This could turn out to be a smart merger, where one plus one equals three." According to the joint statement released by Towers Perrin and Watson Wyatt, it will be a merger of equals, with the result being Towers Watson & Co., a publicly listed company. Based on the closing price of Watson Wyatt common stock on June 26, the equity value of the deal is approximately $3 billion to $3.5 billion. In terms of top management, Watson Wyatt Chief Executive Officer John Haley will serve the new company as CEO; Towers Perrin Chief Executive Officer Mark Mactas will be president. According to the company announcement, Towers Watson, which initially will have about 14,000 employees and operate in 12 countries, anticipates approximately $80 million in pretax annual savings, with significant savings during the first two years following completion of the transaction, expected to happen in the fourth quarter. "Towers Watson will have tremendous global reach and service breadth to meet the growing needs of the world's largest multinational corporations," Haley said in the statement. "As we provide more value for our clients, we in turn create value for our people and our shareholders." Dave Logan, a business professor at Marshall School of Business at the University of Southern California, says the biggest impact of the merger is that it represents the ongoing consolidation in services related to HR, which has greatly reduced spending during the recession. "Organizations are looking to consolidate within a weak market," he says, adding that Towers Perrin and Watson Wyatt, though both HR and compensation consulting firms, are "very different companies." For example, Logan says, Watson is publicly traded and somewhat stronger on the pension side, while Towers Perrin is privately held and boasts a stronger international reputation. For HR practitioners, the merger could be considered bad news because it potentially reduces the number of vendor and trusted-adviser relationships, says Logan, who has done some work with Towers Perrin in the past. "To me, that is a bad sign," he says, adding that the firms, while different, do have obvious overlaps in benefits and other HR processes, so the expected "synergies" means there will be jobs lost within the new firm. "The merger will no doubt put some talent on the street," he says. Nathan says the merger is about more than simply saving money in a tough economy. "You have two very good firms with a broad reach, so it's a good move," he says. "Of course, there will be redundancy, but I would hope that these two firms would be smart enough to do a merger the right way." And therein lies the rub, Nathan says, because in his view, the M&A landscape is littered with failures because merging organizations do not maximize their best resources. "I would like to see a firm like this, that professes to know something, show the world how to do a successful merger," he says. "They ought to be good at it, and there certainly is a lot to be done in that area." Nathan adds that if Towers Watson does pull off a successful merger, it could become a model other organizations can emulate. "They have an opportunity to create a product line through experience, and the market needs it," he says. "This seems to be something to maximize. If done right, this could make for a lot success." For Towers Watson clients, Nathan says, HR executives may worry they will lose their personal connections if principals from either of the companies are laid off. "If that happens, all of a sudden the merger doesn't look so good to you anymore," he says. Other potential downsides are that, as things get tough, some of the most talented principals and consultants may leave to start their own firms or join the competition. In the end, Nathan says, the main problem today is there is so little new business. "Understandably, no one is spending a dime," Nathan says. "But smart guys will say, 'What's over the horizon?' If Towers Watson, or anyone else, nails the M&A process and creates a strong model, it would be powerful." WorldatWork's Johnson says the merger isn't necessarily negative for HR because, as long as long as other sources exist, there will still be competition. "There are still enough providers out there," he says. "But if the consolidation continues, then HR may have a concern." Mark Wilbur, president and CEO at Employers Group, a Los Angeles-based HR consulting firm that focuses on employers in California, says that Watson Wyatt and Towers Perrin have been "waging war" for a long time, but now there should be tremendous savings from the product lines that overlap. "Both firms had major chunks, and now they don't need all the same back office, real estate, talent and other costs," says Wilbur. While there is little doubt that economic pressure is the main driver for the merger, only part of that pressure has to do with the economy, he says. It has more to do with the fact that, at least on the compensation front, the costs of obtaining accurate salary survey data has fallen like a rock with the rise of technology. "Part of the challenge for these large vendors is that clients today have access to data, information and resources that they typically never had in the past," he says. "The value proposition of spending $100,000 on a salary survey is a lot less likely because there are other places to get that information, much more inexpensively." Wilbur adds that the cost of getting that data has dropped as much as 90 percent, so smaller firms are now chipping away at their larger counterparts. The result is those larger firms must seek out ways to reduce costs for competitive reasons that go beyond today's economy. Wilbur says the most interesting aspect of the merger is the public vs. private differences between the two, with Watson Wyatt being used to dealing with managing to quarterly earnings expectations, while Towers Perrin, as a private company, never had to think about those factors, outside of meeting internal financial goals. "It's going to be very interesting to see how it all works," Wilbur says. "With large mergers, it's usually the internal issues that cause failure. When they are out pitching a proposal, they will no doubt put a decent proposition on the table. But in a merger situation, it's the internal workings that usually cause the problem with clients."
July 1, 2009 Copyright 2009© LRP Publications |
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