DOJ Files a Lawsuit To Block the Deal
The U.S. Department of Justice (DOJ) is aiming to block Aon’s proposed acquisition of WTW in a move that took by surprise analysts and lawyers. If the parties don’t reach a settlement before the lawsuit begins, it may be very difficult for the companies to win the case and close this deal, in our view. The companies may still offer more divestitures to appease U.S. regulators, but if the asset sale sought by DOJ is too much for Aon and WTW, the judicial route may be the only option left, and not a good one, for the parties.
While DOJ’s recent precedents in attempting to block deals aren’t particularly good, this is a horizontal merger with clear overlaps in some markets and a dominant position worldwide. This may give DOJ better odds in court.
Europe, Australia, New Zealand May Delay Decisions
EU regulators pushed back the statutory deadline to August 3 and after DOJ’s decision to go to court, it is likely that EU regulators will either use most of the remaining time before issuing a decision, Australia and New Zealand’s deadlines were also pushed back to July and further extensions cannot be ruled out. The companies submitted a remedy package to EU regulators on April 9 which is likely to mitigate the risk of receiving an EU statement of objections, at least for now. Additionally, this move would allow the companies not only to negotiate with EU regulators but also with antitrust regulators in Australia and New Zealand where the companies are also facing significant scrutiny. Yet, the submission of a remedy package doesn’t guarantee that the parties will obtain the antitrust clearance.
Regulators Across the Globe Share Similar Concerns
AON and WTW are facing regulatory headwinds in Europe, U.S., Australia and New Zealand. This is not unusual given the size of the companies and the overlaps in their businesses. The mounting antitrust concerns seem to concentrate in the same markets, this is, commercial insurance for large customers, reinsurance and consulting services for employee benefits.
The statements of issues published by the Australia and New Zealand competition authorities and the press released from the European Commission offered a common view that Aon, WTW and Marsh are the only three companies capable of providing certain insurance services for large multi-national companies. The arguments used by regulators are similar: i) only these companies have the highly technical and skilled personnel needed to sign these multi-million dollar contracts, ii) their databases are unique to provide an accurate coverage and iii) their worldwide presence is essential to assist companies in case of necessity. In view of the regulators, efforts made by smaller companies to create associations or partnerships in order to gain scale and scope aren’t enough to replicate the breath of services and data that Aon, WTW and Marsh can provide.
Why Market Definition is so Important in This Case?
Markets are not explicitly defined global, but the size of the companies have made them, de facto, the only companies which can provide certain services. And here is the crux of the matter. If regulators define the markets by customer size, for instance, large multi-national clients, this deal is a 3-to-2 merger in a market with high barriers to entry and enough transparency that could facilitate collusion between Marsh and the merged entity. If the deal is framed in this way, it would pose significant antitrust risks.
Are remedies an option to appease regulators? It depends on the market definition. If regulators define the markets very narrowly, not only by customer size but also by asset or risk covered, for instance, insurance services for large customers covering marine risks, this may allow the companies to propose selling that specific part of the business to a potential buyer. Yet, if markets are defined only by customer size, the companies are likely to have a bigger problem. Why? Because crafting a suitable remedy may be technically difficult. For instance, selling a portfolio of “selected” clients randomly at a global scale, together with the brokers and databases to a third party may not be possible nor desirable for the companies. And additionally, the reason why Aon, WTW and Marsh are the only ones with the capacity to provide this service is because of their size. Any buyer who could potentially acquire these assets may not have the expertise, data or size to provide these services even with the new assets. Thus, the road for approval requires a very narrow market definition and a total carve-out of that business from one of the companies. Any other alternative may be difficult for the companies to comply with.
