Towers Perrin, Watson Wyatt Merger Could Shake Up Employee Benefits Industry

The pending merger of Towers, Perrin, Forster & Crosby and Watson Wyatt Worldwide Inc. will create a global employee benefits consulting powerhouse that promises to be "a game changer" for the entire industry, experts say.

Last month, the two professional services firms said they would combine in a $3.5 billion deal. The company, to be called Towers Watson & Co., will be the world's biggest employee-benefits consulting firm by total revenue, displacing the Mercer unit of Marsh & McLennan Cos. (NYSE: MMC), said Shlomo Rosenbaum, an analyst at Stifel, Nicolaus & Co.

The new company will have estimated annual revenues of more than $3 billion (BestWire, June 29, 2009).

Mark C. Stephenson, a partner at Nelson Levine de Luca & Horst, a national law firm focused on the insurance industry, said the merger is strategic in that employers' greatest need over the next decade is managing employee benefits, particularly the escalating cost of health insurance premiums, he said. The new Towers Watson will be in a primary position on the single biggest employment-based benefit on the table now -- health insurance -- amid efforts at the federal level to reform the U.S. health care system, Stephenson said.

Eventually, though, other benefits will be targeted, such as the issue of pre-existing health conditions and long-term disability policies, he said. The merger "promises to be a game changer," with all parts of the employee benefits arena fair game, Stephenson said.

The merger comes as many companies, including insurers, are cutting back on spending for consultants. Insurers are cutting expenses because investment income is down and "one area is outside consultants," said Andrew Barile, chief executive officer of a California-based insurance consulting firm that focuses on mergers and acquisitions.

Stephenson also said many of the consulting firms -- Watson Wyatt, Towers Perrin, as well as Hewitt, PricewaterhouseCoopers, Deloitte and Ernst & Young, among others -- derived significant revenue from pension plan consulting. But such revenue will be flat going forward because many pension plans are now "deeply financially distressed," said Stephenson.

Patricia L. Guinn, managing director of Towers Perrin?s risk and financial services business, said the reason for the merger is strategic, and not the recession. Still, insurers and other companies are reducing spending on discretionary projects, Guinn said, including"strategic growth analysis," such as looking at entering developing countries. However, areas in most demand by insurers include risk and capital management, she said.

The deal, according to Stephenson, will transform the market, impacting other employee benefit consulting firms, brokers, major health insurers and employee benefit insurers, he said. With a huge base of employer clients, "everyone has to pay attention to them now," Stephenson said.

Consultants advise their employer clients on how to structure their health plans and on the insurers to choose, he said. Insurers will be forced to deal with Towers Watson in a new way, as it?s "clearly the largest dog in town," Stephenson said. "If I am an insurer, this complicates my life," he said.

Charles Salmans, a spokesman for Mercer, said the company "has always thrived in a competitive environment, and we believe that clients will continue to value the power of the Mercer global brand across our consulting, outsourcing and investments businesses."

The pending merger will provide Aon Consulting an opportunity to look at "how we can strike in the marketplace and maybe gain some business and some market share as a result of the uncertainty such a merger could cause," said David Prosperi, a spokesman for Aon Corp. (NYSE: AOC).

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)