Will Towers Watson Beat the Odds?


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Expert Perspective by Grahall’s OmniMedia Editorial Board

expert perspective telescopeThe Human Resources consulting industry is buzzing after the June 29 announcement that Watson Wyatt and Towers Perrin would merge.  Jeffrey McCracken and Joann S. Lublin, in their June 29 article for The Wall Street Journal   note that “The combined company, to be called Towers Watson & Co…will create the world’s biggest employee-benefits consultancy…”  We wonder how this merger will the delivery of employee benefits compensation consulting services, and who will ultimately benefit?

But before we jump ahead, the daunting task of assimilating these two companies must be undertaken, and prior history illustrates it won’t be easy.   It is well known that 70% of M&A deals fail to achieve anticipated synergies, with a dismal 23% of all acquisitions earning their cost of capital and 58% of mergers “failing to create substantial returns to shareholders”.   Why? Many reasons may contribute, but mergers often fail because of cultural incompatibility, clashing management styles and failure to change.   As Darwin said, it is not the strongest or smartest that survive, but the most adaptable.  Productivity declines in the first four to eight months are reported in 50% of mergers and organizations tend to lose 10% of their market share in the first year following a merger.  No less than eight major studies in recent years found “people and cultural” issues to be the most common failure factors. 

Will these be issues and problems faced by Towers Watson?  Perhaps their experience in assisting other companies with mergers will help to mitigate, for them, some of these grim statistics.  Certainly the companies have the requisite intellectual capital to integrate, but they’ll also need intellectual detachment to make the tough decisions that will impact consultants and clients. 

Unfortunately, the market appears to have some trepidation, as evidenced by the double digit decline in Watson Wyatt stock.  Shlomo Rosenbaum, an analyst at Stifel, Nicolaus & Co, may have captured the market’s reaction best when he stated: “These companies have looked at their growth profile ahead and realised that they were slowing. They’re both leading players in a mature market.” 

In their book entitled “Effective Executive Compensation”.  Grahall’s Michael Graham contrasted and compared two “mythical” consulting companies that they call Tickled Pink (TP) and Wild Wild West (WWW).  These two organizations are vastly different from a people strategy perspective – operational structures, processes and culture. WWW is an entrepreneurial organization with a simple, relatively flat structure.  It is very “person-to-person” dependent and not institutionalized.  Each office is in charge of its own business and has significant authority to make decisions around compensation.  People with similar jobs in different geographies may have significantly different pay.  Tickled Pink, on the other hand, is the poster child for central planning. At TP there is a complex organizational structure with 8 layers of reporting and more rigid job titles, career paths, etc.  Decisions, including compensation, and assignments are made at high levels and it is a “top down“ culture of “we are all in this together.” Practice leaders all receive similar bonuses regardless of performance.   Why is this important?   Well, if Tickled Pink and Wild Wild West were to merge, one of three things would need to occur.  Either 1) one of the two companies’ cultures would need to prevail likely making the “other guys” unhappy, 2) there is a merger both of businesses AND cultures, or 3) both cultures remain in tack operating companionably and successful side by side. 

Back let’s get back to Towers Perrin and Watson Wyatt Worldwide.   We hope for Towers Watson, and for our friends at both these organizations that the merger sidesteps the culture and people strategy landmines and finds a comfortable place in options 2 or 3 above.

But regardless of the culture and people strategy, a critical  concern remains: conflicts of interest must be addressed.

Conflicts of interest have been a subject under scrutiny for some time now, and rightfully so. In fact, the SEC’s recently proposed new rules which would require disclosure of all amounts spent at professional service firms (and details of projects) if those firms also provide executive compensation advice.  This builds on the groundwork laid by Representative Henry Waxman, whose Committee on Oversight and Government Reform issued a report in December of 2007 on the subject of independence.  This report assessed whether “corporate consultants… have a financial conflict of interest if they provide both executive compensation advice and other services to the same company”. The results of that study showed that “Corporate consultants can have a financial conflict of interest if they provide both executive compensation advice and other services to the same company.”

There is no doubt that Watson provides consulting to companies for whom Towers does executive compensation work.  The reverse is certainly true as well.  Although lucrative, executive compensation projects usually do not command the same level of fees as do other human resources consulting projects.  Therefore, in each case where there is overlap, the executive compensation work will need to move, or at a minimum, all projects will be disclosed. 

Beyond those situations where issues of conflict exist, how will Towers and Watson consulting clients feel about the changes?   If the consultants remain the same, and long-term consulting contracts are in place, the clients will likely feel little impact.  But if a “culture war” breaks out at the merged firm and consultants defect, then clients might just follow them out the door.  And those consultants who aren’t troubled by a possible culture change may become frustrated by the inconveniences of merger integration.  Endless meetings, changes to work locations, client and staff management problems, disruptions in benefits programs and the like might be more than a hard working consultant can take.  The best and the brightest might just get fed up and leave, taking clients with them.   

How will the merger impact the shareholders? Interestingly, there is a Fox News segment on the Watson Wyatt website dated June, 2008 suggesting that once again Fox had identified a great but unknown company for investors — Watson Wyatt. At the time Watson Wyatt was selling at $57 and on it’s way up.  Well from the dizzying heights of $62/share (the 52 week high) to the depths of $32/share (the 52 week low) the Watson Wyatt stock is currently selling at about $36/share. It’s hard to imagine the Watson Wyatt shareholders are cheering the news of the merger. 

For privately held Towers Perrin, those shareholders are probably pleased since they explored a pubic offering some time back and only had to withdraw the offering from lack of support/interest.  John Hanratty said: “From the Towers Perrin side, a key driver to do the deal is that Towers Perrin stock will be able to be sold at market value rather than book value by Principals of the firm nearing retirement. They own a large proportion of Towers Perrin’s stock and they will get around 4x more than at book value.”

So here is the “back story”:  Watson Wyatt, a company whose stock is down nearly 50% in one year announces a merger with a private company, Towers Perrin, where fewer than two years ago investors were not interested, and suggests there will be “great synergies”.  Again, for our friends at both these companies and for the shareholders at Watson Wyatt we certainly hope that the synergies are realized, the landmines avoided and continued success ensured.  (We also hope their Executive Compensation clients know how to reach us).

Email Grahall’s Editorial Director at edie.kingston@grahall.com


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