Watson Wyatt Worldwide’s stock closed at $38, down 7.7 percent, on Monday, June 29, in the wake of the firm’s announcement that it was merging with employee-owned Towers Perrin.
The $3.5 billion deal, announced Sunday, will establish the largest HR consulting firm in the world. The new company, Towers Watson, will have 14,000 employees worldwide.
But experts worry that the creation of such a large company will end up diluting the services that clients get—at least in the short term—as both firms are preoccupied with integrating their offerings.
Ashwin Shirvaikar, a Citi Investment Research analyst, downgraded the stock to "Hold" from "Buy," citing short-term concerns about the integration.
“For clients, it’s the classic question of ‘Am I going to be served the same way and what will happen to the talent?’ because there is always a flood of departures when these things happen,” says Neil McEwen, managing consultant at PA Consulting.
Judging by HR services mergers in the past, this union raises the question of whether “bigger is better,” says Jason Corsello, a vice president at consulting firm Knowledge Infusion.
“You look at Hewitt and Exult or PeopleSoft and Oracle and you can see that it’s hard when you bring together two big companies,” Corsello says. “It could potentially create a distraction.”
But Towers Perrin CEO Mark Mactas, who will serve as president of the new company, says the firm has set up processes to make sure the integration goes as smoothly as possible.
“This is something we are very mindful of and we take seriously,” he says. Both Watson Wyatt and Towers Perrin have appointed integration leaders to help with the process. Kevin Meehan, head of North America for Watson Wyatt, will oversee the integration for his company, and Towers Perrin CFO Bob Hogan will take this role for his firm.
Each leader will bring together a team to figure out how to integrate the various processes and geographies, Mactas says.
There will be layoffs as a result of the merger, Mactas says, but it’s too soon to say how many. Overall, the companies expect to attain $80 million in cost savings by the third year after the merger by integrating the two firms.
News of the merger led some HR outsourcing experts to assume that the deal was the reason that Towers Perrin sold its shares of ExcellerateHRO to Hewlett-Packard earlier this month.
“They were clearing the decks so they could do this deal,” says Michel Janssen, managing director at Hackett Group, a Miami-based business process outsourcing consultant.
But Mactas says the timing of that transaction and the deal with Watson Wyatt was coincidental.
“HP initiated those discussions,” he says, referring to why Towers Perrin sold its shares of ExcellerateHRO to the technology company. “It was an extension of their EDS acquisition.”