When competition authorities have the will to bring enforcement actions, the documents of the corporate target often feature as smoking guns. On Wednesday, the US Department of Justice sued to block the merger of Aon and Willis Towers Watson. The deal would shrink the insurance brokerage business from three dominant players to just two. Marsh McClennan is the other juggernaut.
According to the complaint, an Aon executive told colleagues: “we operate in an oligopoly which not everyone understands.” Apparently, US Attorney General Merrick Garland now understands it all too well.
Both Aon and Willis have tax-efficient headquarters in Ireland and a combined top line of $20bn. The only things left for them to do were break apart, make far-afield acquisitions or combine with a large rival.
If regulators are becoming more serious about blocking the latter option in concentrated industries, managers are going to have to become more thoughtful about creating shareholder value.
The view of Aon and Willis is that the insurance and benefits needs of big companies are becoming highly complex. Risks have expanded to include cyber and climate threats. A mega broker and consultant should be uniquely appealing to customers.
The flip side is that shrinking the pool of competitors by a third would just lead to higher prices.
The pair did not flag any pricing power benefits when they announced the merger. They did, however, note that there were big cost savings that would contribute to $800m in annual “synergies”. The companies even went to the trouble of capitalising the value of those benefits, saying they were worth $10bn, more than a tenth of the combined market values of the two.
Aon and Willis can fight the DoJ lawsuit. They are already making divestitures to mollify other jurisdictions.
The lesson for big companies and their investors is that, at some point corporate scale advantages will be seen as a disadvantage to everyone else. Regulators have to protect competition. That imperative needs to favour newcomers and disrupters over incumbents for capitalism to remain healthy.
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