The market has decided that Aon (NYSE:AON), the British insurance conglomerate, goofed in merging with rival Willis Towers Watson (NASDAQ:WLTW) and AON stock paid the price.
Fortunately, the U.S. Justice Department got them off the hook. The two companies abandoned their plans in the wake of an antitrust lawsuit.
In response Aon stock took off, jumping 13% in just a week. Willis fell by an equal percentage, but analysts are already flagging that as a buying opportunity.
Aon trades today at about $250/share. That’s a market cap of around $59.5 billion and a price-to-earnings ratio of nearly 29, with a 51 cent/share dividend yielding just .77%.
What the bulls see is the upside of disaster. When insurers have a bad year they can raise prices, which means more money coming in which they can then invest.
A Closer Look at AON Stock
Aon earned $379 million, $1.66 per fully diluted share, on revenue of $2.88 billion during the second quarter.
Income was down from $398 million, $1.70 per share, a year ago, but revenue rose by 16%, from just $2.5 billion. Revenue was 7.3% higher than expected, and profits were 24% ahead of estimates.
This meant Aon lost none of its post-non-merger bounce, rising about .5% in overnight trading. During the quarter the company also bought back 1.1 million shares and hiked the dividend by 11%.
Aon and WTWL are the second and third largest insurance brokers in the world. Attorney General Merrick Garland, however, sounded like a happy analyst in his statement on the break-up’s break-up. He called it “a victory for competition and for American businesses.”
It also looks like a victory for investors.
An Ill-conceived Deal
It makes you wonder just why the two companies agreed to the deal in the first place.
The announcement came March 9, 2020, just before the pandemic lockdowns. At the time the two companies said it would “accelerate innovation on behalf of clients.” But this makes no sense given the immense technology debt of combining the companies’ IT systems.
It also would have meant issuing new shares of Aon common.
The deal announcement had sent shares of both companies down, especially WTWL, which was at $35/share in mid-February but below $14 by the end of March. March 30 represented the pandemic low, with Aon stock having fallen by about one-third between mid-February and March 30.
Since then both stocks have ground higher, but WTWL has yet to regain its pre-pandemic levels, although Aon is now over 10% higher. Three class action lawsuits were filed against WTWL in the wake of the deal, alleging misleading financial filings.
The terms of the merger put both companies on the hook for about $300 million in expenses if the deal broke down. That’s a big number, but the market has decided it’s affordable.
Aon has now reorganized its leadership in the wake of the failed merger, scrapping the executive committee set-up that would have run the combined company.
The Bottom Line
Mergers are expensive things.
Every company is a tech company. Every large merger means combining tech units. That’s a process that can take years, with systems scrapped and others overloaded in a mad scramble among IT teams.
Yet these costs are seldom considered when managements get together. As with the BB&T-SunTrust merger to create Truist (NYSE:TFC), which was completed, all the “synergies” that glitter are not gold.
I still wouldn’t buy Aon. The yield looks too low. Over the last five years, gains from insurance stocks have trailed the market, but Aon is a better buy today than it was a month ago.
Disasters like climate change do bring insurers pricing power. I might regret the decision to hold off.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future, now available at the Amazon Kindle store. Write him at firstname.lastname@example.org or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.