Towers Watson & Co., the U.S. consulting firm that’s seeking shareholder approval to merge with insurance broker Willis Group Holdings Plc, is increasingly highlighting the tax benefits that would come with a shift to Europe.
A combination would provide “a more efficient tax profile for Towers Watson,” the consulting firm said in a letter to investors Wednesday. With the lower rate, the company will be “saving approximately $75 million annually within two years.”
Towers Watson is facing investor criticism that it agreed to unfavorable terms with Willis, whose shareholders will hold about 50.1 percent of the combined company, under a cash-and-stock deal announced in June. The consulting firm was valued at about $8.7 billion based on Willis’s share price when the agreement was announced, and Towers Watson dropped 8.8 percent that day.
Driehaus Capital Management LLC faulted the deal as a “take-under” and urged fellow investors to oppose the transaction. The vote is scheduled for Nov. 18.
Darren Marcus, an analyst at MKM Partners, said that taxes were probably among many considerations for management when weighing a transaction. He pointed out that Aon Plc, which provides insurance brokerage and consulting services, moved years ago to London from Chicago.
Still, he said that companies have to walk a fine line when discussing taxes. President Barack Obama has faulted U.S. companies that move overseas in search of lower corporate tax bills. And billionaire investor Carl Icahn said in a letter posted on his website that he would fund a political effort to reverse the “pernicious effects that are occurring and will continue to occur as a result of Congress’s failure to immediately stop so many of our great companies from leaving our country.”
Because of the political climate, companies are “not going to come out and say, ‘Hey we’re doing this deal because we’re saving so much on taxes,'” Marcus said in a phone interview. “You can’t come out and say that. But if you’re following all the rules, and you’re merging with a company that happens to be domiciled somewhere else, and you could justify why you’ll be domiciled there, then great. It’s a great benefit.”
The merger partners acknowledged from the beginning that Towers Watson would enjoy lower rates after a transaction. In a June 30 conference call held by the companies, the tax benefit was described as “a nice consequence” of a deal that was driven by business purposes.
In a July presentation, Towers Watson said tax savings would contribute about one-third of the $4.7 billion in value that the company predicted would be created by a deal. In a footnote in that presentation, the consulting firm said that was based on $75 million of tax savings a year.
The letter Wednesday is more explicit, using capital letters to help highlight the point. The deal provides “Clearly Identified and Highly Achievable Cost Synergies and Irish-Domicile Tax Benefits,” wrote Towers Watson CEO John Haley and Lead Independent Director Linda Rabbitt.
Haley, who would lead the combined company, also said a deal would provide opportunities to increase revenue, add clients and cut costs.
“Based on our proven track record of realizing synergies in other business combinations, we are confident in our ability to achieve these synergies,” he said. “In addition to the highly achievable cost savings, the combined organization will maintain Willis’s Irish domicile, which is expected to lower our effective tax rate to the mid-20 percent range – compared to the current tax rate in the mid-30 percent range.”