Top consulting firms to merge

Two of the country's largest human resources consulting firms, Towers Perrin Forster & Crosby Inc. and Watson Wyatt Worldwide Inc., agreed to merge in a deal reflecting recession-induced consolidation in the consulting industry.

The combined company, to be called Towers Watson & Co., will have annual sales of about $3.2-billion (U.S.) with 14,000 employees. It will be publicly listed, as is Watson Wyatt. Towers Perrin is closely held.

The merger will create the world's biggest employee-benefits consultancy, displacing the Mercer unit of Marsh & McLennan Cos., according to Shlomo Rosenbaum, an analyst at Stifel, Nicolaus & Co. Before yesterday's announcement, Watson Wyatt held second place while Towers Perrin ranked fifth among global providers of employee benefits advice, he said.

Watson Wyatt is a strong player in pension consulting while Towers Perrin is stronger in health-care consulting than Watson Wyatt, Mr. Rosenbaum said. He said it's unclear whether the firms will "be able to cross-sell products that the other one does not have."

The deal is an all-stock transaction with no cash changing hands and no premium paid on Watson Wyatt shares, which closed in trading Friday at $41.18. Shareholders of each firm will hold 50 per cent of the new firm. Towers Perrin's shareholders are all employees. The companies valued the deal at $3.5-billion in a statement, a calculation based on a valuation of both companies. Watson Wyatt's market capitalization had been $1.76-billion.

Both firms, and rivals, are facing pressure as companies cut back on spending for consultants. Watson Wyatt and Towers Perrin often handle routine tasks for employers such as health-insurance claims. The firms typically are paid based on the number of transactions or workers, but layoffs and cuts in discretionary projects such as talent management are crimping revenue.

Watson Wyatt in May reported fiscal third-quarter results below analyst expectations and lowered its projections for the fiscal year ending tomorrow. Revenue for its latest quarter fell 9 per cent from the prior year. Revenue in Watson's human capital group, which offers consulting on compensation and talent management, fell 25 per cent, and the group reported an operating loss.

A Towers Perrin spokesman said it hasn't had merger talks "with any other firms over the past year besides Watson Wyatt."

"We've thought all along there'd be consolidation in the industry," said Watson Wyatt chief executive officer John Haley, who will retain that title at the merged firm. "Our two sides started talking in the middle of last year and we think this is something that makes us a strong player," he said. Towers Perrin CEO Mark Mactas will become president.

Mr. Haley said the firms expect combined revenue this year to decline to roughly $3.2-billion, from $3.4-billion last year. The combination should help the firm save about $80-million in annual operating costs, he said.

Mr. Haley said Towers Watson will also do a lot of work helping insurance companies manage risk. About half of its annual sales will be in the U.S.