Aon plc (WTW) Earnings Call Transcript & Summary

Hello, and thank you for holding. Welcome to today's conference call regarding the combination of Aon and Willis Towers Watson, creating a next-generation global professional services firm. Further details in respect of the proposed combination of Aon and Willis Towers Watson are provided in the announcement published by Aon on March 9, 2020, in accordance with Rule 2.5 of the Irish Takeover Rules. The Rule 2.5 announcement and capitalized terms used but not defined in this communication shall have the meaning given to them in the Rule 2.5 announcement. This communication should be read in conjunction with and is subject to the full text of the 2.5 announcement, including its appendices, which shall take precedence in the event of any inconsistency. With that, I would like to turn the call over to Greg Case, CEO of Aon. Please go ahead.

Thanks very much, and good morning, everyone. Thank you for joining us today on such short notice. It is our pleasure to be here this morning with clients, colleagues and shareholders from around the world to discuss this exciting step. Joining today is the CEO of Willis Towers Watson, John Haley; and Aon CFO, Christa Davies. I would note that there are slides available on our website that will supplement our discussion. I would also note that this transaction is governed by Irish Takeover Rules, and we have published an announcement under Rule 2.5 of those rules, which has additional information about the proposed combination. This morning, we announced that we have entered into a definitive agreement for an all-stock combination with Willis Towers Watson. This highly complementary combination brings together expertise from across each organization to better understand client needs. Our combined firm will accelerate innovation on behalf of clients and be better able to deliver more value to all stakeholders. And while we will be bigger, yes, that's not what this transaction is about. This is about better. We will fundamentally be more innovative, more capable, more relevant and more responsive upon close. And we will combine diverse experience from our 95,000 colleagues and shared values from both of our organizations. To put this in context, I'd like to first address the question of why now. Why now? Our Aon United growth strategy is working. We're delivering results for clients which we see in decade-high retention rates and record new business generation. On our key financial metrics, our 2019 organic growth of 6% was the highest we've achieved in 15 years, and we delivered record margins of 27.5% and double-digit free cash flow growth. But our clients are facing greater challenges than ever before, in large and growing categories of the global economy, in risk, retirement and health. These categories have demand characteristics that are increasing in both magnitude and complexity. Six of the top 10 global risks are uninsured or underinsured according to our Global Risk Survey. Difficult to model risks such as cyber, intellectual property and climate change are on the rise. Against that backdrop, we have taken significant steps to respond with actions that bring the full force of our firm to clients by developing innovative solutions and applying data and analytics to better inform and advise clients. But we're not going fast enough. And we believe, with our Willis Towers Watson colleagues, and I'm sure they would agree that despite strong success and demonstrated progress against our individual growth strategies, there is significant opportunity to accelerate together. Like us, Willis Towers Watson has a growth strategy with demonstrated success. The complementary set of capabilities that Willis Towers Watson brings and their demonstrated track record will allow us to continue to deliver our growth strategy, the Aon United blueprint, in 3 ways. First, we'll build on the success of our Aon United strategy with the addition of sophisticated, complementary capabilities. We have a shared vision to bring the best of our combined firm to clients on the topics of risk, retirement and health. We can bring together tools like the Willis Towers Watson digital health platform and the Aon digital risk platform to offer clients more complete solutions or bring our capabilities from Townsend to their Outsourced Chief Investment Officer client base. And most important, we'll bring the full force of the firm to clients together because when we come as one firm, we do more for and with clients. Second, we share our belief that data and analytics will enable us to unlock new sources of client value. Our combined firm, with over $20 billion of revenue and $2.4 billion of free cash flow on a pro forma 2019 basis has the ability to invest significantly in new solutions and build on our technology-enabled analytics platforms. This allows us to broaden our reach, grow the overall pie and create net new opportunities to meet growing demand. And third, we will leverage our Aon Business Services platform to continuously strengthen and share innovation across the firm. This platform drives ongoing operational efficiency and productivity improvement and provides client-facing colleagues more capacity to address client needs. We continue to look for ways to standardize, automate and improve how we work, which enables better solutions through globally shared best practices, reduces cost and improves colleague engagement. I am also delighted to announce that following the close of the transaction, John will serve as Executive Chairman, focused on driving growth and innovation. John is a truly accomplished industry veteran with a long-standing record of delivering growth, innovation and results for clients and stakeholders. We've long admired Willis Towers Watson's vision, strategy and execution and are thrilled about what this partnership means for all of our stakeholders. And I now want to turn over to John for his thoughts.

Thanks very much, Greg. This is a momentous next step for both of our organizations, and I'm equally excited about the next chapter and the value that it will create for clients, colleagues and shareholders. This combination is the next step in the journey of growth strategies and shared visions that each of our organizations have worked so hard to implement. I see strong similarities in our vision to meet client needs. Our business is built on enhancing our value proposition, and in order to do that, we've built a compelling platform of solutions and services, which we match with client service and innovation. We're going to accelerate this history of innovation and growth in partnership with Aon. For example, Willis Towers Watson has developed a key pension management offering called OneDB that gives trustees and sponsors access to pension scheme data and analytics around financials, demographics, investment performance and administration focus in real time. Tools like this are exactly the type of innovative capabilities that can be developed further across the broader organization to deliver additional client value. When we bring our organizations together, we'll be able to accelerate innovation in a way that is truly compelling for our clients. We're going to combine 95,000 diverse and talented colleagues' deep industry expertise, integrated technology and data and analytic capabilities. We're going to be able to drive better insights, and that's going to translate into better advice. And this forms the basis for better client decisions that will enable deeper relationships, more innovation and increased relevance with our clients. Further, I'm excited about this combination because like Aon, we have deep expertise executing large complex transformations. Like Aon, our company has come together over time, bringing brands like Willis, Towers Watson and Gras Savoye and others together. And more importantly, like Aon, we're highly focused on bringing together content and capabilities to deliver best-in-class solutions to meet client needs. I'm also very excited to partner with this leadership team. They've built a culture of growth and innovation, and they have a long track record of shareholder value creation and meaningful experience integrating transformative deals. I know that together we'll be able to accomplish better outcomes that unlock new sources of value for all stakeholders. So with that, I'll turn the call back to Greg.

Thanks very much, John. We could not be more excited about the opportunity that this transaction unlocks as we strive to deliver best-in-class results for clients while delivering strong results for shareholders and strengthening the overall financial profile of the firm. The transaction is expected to be accretive to adjusted EPS in year 1 for Aon shareholders, with peak adjusted EPS accretion in the high teens after full realization of $800 million of expected pretax synergies by the end of year 3. Free cash flow is expected to breakeven in the second full year of the combination, and free cash flow accretion is expected to be over 10% after full realization of expected synergies, unlocking significant shareholder value creation over time. In summary, we are incredibly excited about this combination, which will build on both Aon and Willis Towers Watson's long-standing commitment to accelerating innovation on behalf of clients. This represents another important step in our Aon United growth strategy as we continue to focus on delivering better content and capability that results in better outcomes for clients, expanded opportunities for colleagues and improved growth for the firm against our target of sustainably delivering mid-single-digit or greater organic revenue growth and double-digit free cash flow growth over the long term. With that overview, I'd like to turn the call over to Christa to walk through the transaction financials and how the strategic combination will contribute to continued shareholder value creation over the long term. Christa?

Thanks so much, Greg. As Greg and John described, this morning's announcement is an exciting next step for Aon that enables us to better accelerate innovation from both organizations and deliver complementary capabilities that unlock new sources of value for all stakeholders while improving the long-term financial profile of the firm. Greg highlighted how this transformational deal will enable us to accelerate our growth strategy for 3 reasons. First, our organizations' shared growth vision will allow us to build on the success of our Aon United strategy with enhanced capabilities from the combined firm. Second, we'll leverage the power of data and analytics to unlock new sources of client value. And third, we'll utilize our Aon Business Services platform to drive operational and productivity improvements and share innovation across the firm. As we double down on our strategy, we are maintaining our ongoing commitment to our long-term financial goals of mid-single-digit or greater organic revenue growth and double-digit free cash flow growth for the combined firm. Now let me discuss the transaction and the financials. We intend to combine with Willis Towers Watson in an all-stock transaction. Each Willis Towers Watson share will be exchanged for 1.08 shares of Aon at a fixed exchange ratio. Based on ordinary shares outstanding at the time of signing, Aon shareholders will own approximately 63% of the combined firm on a fully diluted basis, and Willis Towers Watson shareholders will own approximately 37%. This represents a total consideration of $231.99 per share based on Aon's closing stock price of $214.18 per share on March 6, 2020, and implies a premium of 16.2% to Willis Towers Watson's closing share price on March 6, 2020. The transaction is expected to close in the first half of 2021. While this transaction is, first and foremost, about driving growth by increasing innovation for clients, there are also significant opportunities for efficiencies in our combined cost base which creates significant shareholder value. We expect $800 million of annualized pretax cost synergies by the third full year of the combination. As Greg mentioned, the transaction is accretive to Aon adjusted EPS in year 1, with peak adjusted EPS accretion in the high teens after the full realization of expected synergies. Free cash flow is expected to breakeven in the second year with free cash flow accretion of over 10% after the full realization of expected synergies. This transaction is expected to create over $10 billion in shareholder value from the capitalized value of expected synergies. Our primary assumptions are outlined on Page 13 of the presentation slides. I would note that these inputs reflect our best estimate at time of signing and are subject to change. We've chosen to provide these numbers for transparency at a point in time, but do not intend updating each bucket in the future as we integrate the firms. The baseline for accretion dilution impact was calculated using combined pro forma company projections, which represent our best estimates as of March 9, 2020. These projections incorporate long-range plan assumptions from both companies and are generally consistent with analyst consensus estimates for the next 2 years and trended thereafter. The main driver of accretion to adjusted EPS is expected synergies, partially offset by retention costs and a portion of integration costs that will flow through operating results. The $800 million of annual synergies are principally sourced from the consolidation of business and central support functions, including leveraging the capabilities of the Aon Business Services operational platform across the combined group and from the consolidation of infrastructure related to technology, real estate and third-party contracts. Synergies are expected to be $267 million in year 1, $600 million in year 2 and $800 million of annual run rate synergies in year 3. We expect $1.4 billion of integration costs to achieve these synergies, incurring $700 million in year 1, $490 million in year 2 and $210 million in year 3. An estimated 20% of the cost in each year is expected to be reported as part of overall operating performance, and the remainder will be adjusted out of our GAAP financial results. We also expect to incur approximately $400 million in retention costs, subject to approval by the Irish Takeover panel, which will be spread evenly over 3 years and be reported as part of overall operating performance. With respect to interest expense, no incremental debt will be issued for this transaction. Turning to cash. Free cash flow is expected to be dilutive in year 1 primarily driven by transaction and integration costs, breakeven in year 2 and be 5% to 10% accretive in year 3, with free cash flow accretion of over 10% after full realization of expected synergies and completion of spend on integration, allowing for significant investment in the business long term. We will continue to manage the firm and allocate capital on a disciplined return on invested capital basis and invest in free cash flow in the highest return opportunities or return directly to shareholders. We are maintaining our goal of double-digit free cash flow growth over the long term. The combined firm is committed to maintaining Aon's current credit rating. Overall, this transaction will create a strong combined growth profile as the new organization brings together complementary expertise to better understand client needs and accelerate innovation. The combined organization will be better positioned due to existing investments in technology-enabled analytics platforms and better placed to deliver new solutions in areas like cyber risk, intellectual property and climate risk. This will enable us to deliver against our target, sustainable mid-single-digit operational organic revenue growth over the long term. Combined with cost synergies and the opportunity to optimize operations and drive productivity through Aon Business Services, the transaction is expected to unlock meaningful shareholder value creation. Before I open the call to questions, please be aware that while we'll do our best to provide answers, this transaction falls under Irish Takeover Rules. So there are certain limitations to the information we can provide. We've published an announcement under Rule 2.5 of those rules, which includes the information we can publicly discuss. We expect to publish a proxy in the coming months with further information. With that, I'd like to turn the call back over to the operator, and we'd be delighted to take your questions.

[Operator Instructions] Our first question is coming from the line of Elyse Greenspan from Wells Fargo.

My first question. So the EPS accretion analysis is very helpful. But what we're trying to get a grasp of is were revenue dis-synergies contemplated in this transaction? I'm not sure how much you could say there, but if you could maybe talk about some of the businesses, I'm not sure if it's Willis Re or there's other areas where there's too much overlap that you guys might be considering from a concentration standpoint just as we think about how you guys came together in this transaction?

Thank you so much, Elyse. And in terms of the synergies, under Irish Takeover Rules, I can disclose cost synergies only. And what we can say is the deal is incredibly financially attractive on this basis alone. What we would say is, philosophically, as you heard Greg and John talk about, we believe there is substantial unmet demand from clients. And as we accelerate innovation and develop new solutions, we expect substantial upside over time.

And Elyse, maybe I'll address the second part of your question on the overall portfolio. I'll just say, listen, we just -- this opportunity for clients is terrific. We got great advice and counsel on the topic you raised. We feel really good about this. We view the proposed transaction is highly complementary. It's a very competitive industry. And we're confident we're going to obtain all the necessary approvals across the portfolio. But really, this is about client benefit, and ultimately, it's going to be seen as something that's highly beneficial for clients over time.

Okay. And then just another point of clarification. You guys reaffirmed your mid-single-digit or greater organic growth target. So I'm assuming you're making that comment, assuming when the deal closed, that the combined firms would be able show organic growth at least in line with the level that Aon's been showing as an independent company?

Again, Elyse, and consistent with sort of this is about addressing unmet client need and how we continue to do that in a more effective way over time, we'll absolutely be reaffirming sort of that perspective for the combined firm going forward and what we're about.

Our next question is coming from the line of Meyer Shields from KBW.

I think this is a related question. But I was wondering, it seems like there are some businesses within Willis Towers Watson that Aon has decided that it does not want to be in. So I was wondering if you could comment on that in general. And whether the $800 million of expense synergies is growth of all of the current Willis Towers Watson business portfolio.

So first of all, let me take the second one around, and Christa can add on that. If we think about the overall opportunity, this is a combined firm opportunity full stop. Opportunity to address unmet client need together. We're very excited with John -- extensive conversations with John around the combined talent of our firm and as it comes together and very much looking forward to really thinking about that as the best talent coming together from across both firms. And really, if you think about the platform we're going to have in place, we're just -- it's going to be very, very important to be able to do that on behalf of clients, so we're looking forward to that sort of against this. And excited -- if you think about some of the growth areas, TRANZACT, we just love that, John. Tremendous effort what you've accomplished, they're terrific. So think about TRANZACT sort of in the Aon environment on behalf of clients. Amazing. There are a few things we did. I think about CoverWallet in the context of the Willis Towers Watson environment. This is an incredible set of opportunities. So do think about it, Meyer, sort of an overall firm, sort of in all the different pieces in terms of sort of what we're trying to do over time.

Okay. That's helpful. Can you give us any thoughts on either the tax rate of the combined entities and/or the potential for intercompany debt?

Yes. So Meyer, we don't give forward tax guidance. What we have disclosed previously for Aon is historically, over the last 3 years, our underlying tax rate net of discrete items, which can be favorable or unfavorable, was approximately 18%. And I do note on the Willis Towers Watson Q4 earnings conference call, management stated their firm's underlying tax rate excluding discrete items was approximately 21%. And that they expected the 2020 underlying tax rate excluding discrete items to be around 20%. And so we're not giving guidance going forward for the combined firm.

Our next question is coming from the line of Jimmy Bhullar from JPMorgan.

So first, and you mentioned some of this on your -- in your comments as well, and I think I can understand the rationale for the deal in terms of scale and expense savings. But what are the -- if you think about Aon's business currently, you're sort of the top -- or one of the top companies in most of the business lines you're in. What are the sort of capabilities that you don't have currently that this deal sort of adds? Because I think you mentioned you expect this to allow you to grow even faster. So normally, the bigger you get, the slower the growth would be?

Jimmy, this is such an important question. And I'm going to offer it, so I want to get John's thought on this, too. This isn't about bigger. As we described, this is about better. And if you step back and think about client need, an unmet client need and ask a question, how have we done over time as an overall industry against addressing continuing increasing client need? And if you look at sort of different metrics, think about literally claims as a percent of GDP. That's a percentage that went up for 30 years up to 1990. And then literally, Jimmy, every decade, every year since for 3 decades, it's gone down. It's hard not to sort of come to the conclusion that overall, as an industry, we're not progressing as fast as our clients on a lot of the topics that are important to them. So this effort, this combination is about how we address unmet need. When you think about the ability to come together sort of in cyber and really address holistically the challenges of cyber, so instead of the $6 billion market, it's more like $20 billion or $30 billion or $40 billion opportunity for our clients in terms of sort of where they are. Think about our client demands in things like intangible assets and how we can address unmet needs on intangible assets, that's an area that's 85% of their value across the S&P 500. And our industry hasn't done really anything about it. So this is really about not the existing pie and the zero-sum game in that in any way, shape or form. This is about how we think about unmet need and how we think about overall how we address that in a much more holistic way. And just one other one, and I know it's near to John's heart. This whole idea of retirement and health. The fact of the matter is, our clients and employees are overspending on health on average and underspending on retirement. Think about if we can actually adjust that, turn that dial just 2 notches on their behalf in a more attractive way, we can change the lives of families over the course of a decade or 2 decades. This is what this combination is about. But John, you've thought about this a lot as well.

So thanks, Greg. And I fundamentally, as you know, agree with everything you just said about the transaction. And particularly the important point, this isn't about getting bigger. And in fact, the most attractive part of this combination is the fact that we bring together some complementary capabilities. So Jimmy, you asked about data and analytics. And I think when I look at that, what Aon brings to the table in terms of some of the data analytics, particularly with regard to information they can supply to carriers, just fantastic stuff. When I look at some of the data and analytics that we bring together that we can deliver to clients, particularly from our insurance consulting and technology, it's a great fit with the capabilities they have. And I think to us, the exciting thing is it's partly about that complementary nature of that. But it's more important that together we can build new things and deliver new value to clients, that the whole premise about this merger is not about where we are today, it's about where we can be in the future.

Okay. And then another question just on -- for Christa. On your current financials, you've been obviously pretty active in buying back stock. I think you bought close to $2 billion last year. Should -- are you continue -- expected to -- are you continuing to buy back stock as you go through this year? Or should we assume that that's going to slow down or accelerate or -- and then any other impacts on your financials going into the deal close? I think you said middle of next year or so.

Yes. So we do expect the transaction to close in the first half of 2021. Jimmy, as we manage through 2020, we continue to manage capital on a return on invested capital basis and allocate capital to the highest return opportunities. Share repurchase remains Aon's highest return opportunity. And so we'll continue to repurchase shares in 2020, similar to 2019, subject to U.S. securities law limitations. We are managing our capital structure to maintain our current credit rating, and it's likely acquisition spend will slow compared to our original plan.

Our next question is coming from the line of Dave Styblo of Jefferies.

Just curious in terms of the rationale and timing and so forth, appreciate the comments there, Greg. Curious, why now versus a year ago? Was it just you didn't have enough time to get through some of the things, blocking and tackling of a potential transaction? Or is there something that has changed? Obviously, I think Willis Towers has gotten a little bit more steady and consistent with its performance of delivering on organic growth and margin expansion. But just curious why now versus a year ago?

Really completely separate discussions. What we just announced today was governed completely in full compliance with the Irish Takeover Rules in terms of sort of where we are. And there's a limit to what we can say today, but there's lot more context you'll see in the proxy filing coming up. I would just say this, we know each other well and this came together relatively quickly based on our knowledge. And just as John, I think, described so well, it was really about the opportunity to address unmet client need and increasing relevance on their behalf and that's how it came together relatively quickly.

Okay. That was actually part of the second question, was in terms of the cost synergies, I'm curious how you guys went about scoring that. How much time you had? It sounds like you didn't have maybe as much time on this end. But can you talk about the process? Maybe that's a question for Christa how you looked at achieving the cost synergies and you guys have obviously done a good job of delivering upside to that. I suspect that you just have an opportunity to take a high-level view, but curious how deep you got into it and if there's -- do you think there's potentially upside to that savings target in the out year?

Yes. So Dave, we have got an incredibly detailed synergy model, and it's actually gone through an amazingly detailed process in the U.K. called expertization, which really kicks the tires on these synergies in an incredibly robust way. And what we would say is we feel really good about delivering these synergies by the third full year of the combination. And there's no upside that we expect. And we are very experienced at integrating significant transactions such as Benfield and Hewitt and these expectations of cost synergies are very much in line with those transactions.

And I might add to that. If you think about it, again, as John highlighted, there's a lot of expertise on both sides as sort of as combinations come together. So we've got a joint team really thinking about sort of how to pull this off. And then we come back to the Aon United blueprint and what we've done together and similar to undertakings by Willis Towers Watson as well. So we've got a template on how we're going to apply all these opportunities across the combined organization.

Okay. Great. And then one last quick one. I know Greg, you talked about the industry not keeping up with some of the things on the client side and just not able to go fast enough. What does the deal give you additional capabilities on? Is that more just from drawing on the expertise that Willis have in areas that you don't? Or is it more so some of the gross cost savings that you'd be reinvesting in the business?

Yes, literally, Dave, this is such an important part of this discussion. I'm so glad you came back to this. This is about how we address unmet client need across the board in so many ways. So consider our ability, as I described on -- just pick topics. And the complementary capabilities that Willis Towers Watson brings to the table, the talent that comes to the table. Day 1, we're going to be stronger and better, more capable to address areas like climate change based on some of the capability and expertise that is within Willis Towers Watson. On the health side, when you think about sort of what the investments have been made by Willis Towers Watson on that, they truly complement the investments we've made. Tremendously important in terms of sort of client need. On the retirement side, the opportunities as we think about sort of the retiree population and how we address that group, again, another set of opportunities. From an overall, looking at different client needs, whether it's large clients or medium-sized clients, we bring complementary capabilities. And then just the analytic capability that the combined firm brings to the table is also -- continues to build. And then as you said, we'll be able to invest sort of in that capability and continue to build it. So this is what really got us excited, I think what got John excited. And this is what we think our combined talent base, our colleagues around the world are going to see this. They're going to see an ability to have more impact with clients in a very effective way and that we think is going to be very compelling for them. And so our clients are going to see this as tremendously supportive of them. Our colleagues are going to see it as something that's really inspiring, and that's really what we're pretty excited about. And candidly, it shows up sort of in all aspects of risk, it shows up in reinsurance, it shows up in retirement, it shows up in investments and it shows up in health. So we see this really across the board. John, anything else you'd add to that?

No, I think you nailed it, Greg. I mean we're excited about this across the whole range of the portfolio. And the comment I'd come back to is this is about getting better, and it's about better able -- being better able to serve clients and leading to better outcomes for them.

Our next question is coming from the line of Suneet Kamath.

I wanted to come back to Elyse's question about potential revenue dis-synergies and just make sure I understand what the answer was. Is it that you're not able to disclose any revenue dis-synergies? Or you do not expect there will be any revenue dis-synergies? And also curious if you had a look at what the client overlap is between the 2 firms.

Yes. So we do not expect, based on the complementary nature of our client base, to experience revenue dis-synergies. What we have disclosed on the Irish Takeover Rules is cost synergies. And we believe that the deal is financially attractive, in fact, very financially attractive based on that alone. And what you've heard John and Greg say during the call today, and obviously throughout the materials we posted is, we believe there's substantial unmet client need, and therefore, substantial upside opportunity over time.

And then on the client overlap?

We do believe that the businesses are very complementary. I think John and Greg have talked about quite a lot whether that's by country or whether that's by client segment. And a lot of the capabilities actually complement each other, so we're very excited about the potential upside.

And I think what Christa has highlighted is, listen, we are restricted, very restricted, in sort of in our conversation today and there'll be more over time in the proxy and other areas. But step back away from this transaction completely and just think about the idea of as you bring firms together, they're always going to be sort of back and forth. What I think you're picking up is when you sort of net it all and ask the question, opportunity to support clients in a more effective way and then obviously, there are strains that come with that, the overlap you're describing. I think on balance, we're essentially not for this. But over time, as you think about how this has come together, if you look at sort of John's historic achievements and ours as well, these all come together in a way that we think on balance is opportunity for clients and so that will be reflected for us. So not trying to be cryptic here, just trying be very clear in terms of what we can say at this point.

Yes. Got it. Makes sense. And then how do we think about any antitrust issues that may come up with such a large combination?

Right. And as I said before in terms of sort of where we are in that process, we've had great counsel on the topic, and we really feel good about this. The proposed transaction is highly complementary. It's a very, very competitive industry. And ultimately, you're going to get to your [ reflection ], clients are going to see greater opportunity and benefit, really benefit, more than anything else in terms of sort of what this comes out of.

Our next question is coming from the line of Paul Newsome from Piper Sandler.

I'm getting some questions that seem to suggest that there's some confusion about exactly who's -- which regulatory body is the constraining regulator and how that also relates to divestitures. Could you just talk about who are the primary regulators here? And is the U.S. regulator that involved in this situation as well? Just the process is what I'm asking for.

I'll offer you an overview and then Christa, you can talk about sort of this from an overall antitrust standpoint. There's no constraining here. It just is what it is, and we're working very well sort of underneath the overall Irish Takeover Rules and takeover code. So that's the overall piece. And as it relates to antitrust...

Yes. So what I would say is sort of 3 different regulatory interplays here. The first is we're governed by Irish Takeover code and the panel. And so that's sort of -- that's the body under which we filed the merger agreement, the 2.5 we filed today. The second thing I'd say is we're obviously filing a proxy because we're both listed in the U.S. and that's under SEC guidance. And the third is we'll be applying to regulatory approval in lots of countries around the world. And so they're sort of -- that's how all that nets together.

Our next question is coming from the line of Brian Meredith of UBS.

Just one or 2 quick ones here. Greg, just curious, you talked a little bit about businesses maybe that are complementary. How about geographically? How does this kind of add to Aon as you kind of put yourself together with Willis Towers Watson? Any areas particularly we should think about that's better from emerging markets, et cetera?

Listen, Brian, terrific question. Again, back to kind of the complementary capabilities as they come together. As you know well, and you think about kind of around the world, the world of risk is very under representative in certain parts of the world. So all of us are frankly underrepresented in terms of being able to address client needs. And so together, we'll be stronger and able to do that certainly in the emerging markets very, very positively. But frankly, there are also some geographic footprints in which we grew up and have some unique assets in certain parts of the world, Willis Towers Watson in other parts of the world, they're going to come together now. And so for us, we think there's benefit here for clients around sort of geographic support but -- and as John highlighted, also around kind of content and capability support and it really is kind of across the board.

Great. And then this one I would just throw it in the air. Any thoughts with respect to kind of economic slowdown or anything potentially disrupting this given what's going on right now with the coronavirus?

Well, listen, Brian, we thought about that a lot, as you might imagine. And listen, from our standpoint, you got to come back to your mission, what you're about. The world is a difficult and complex place, we know that, becoming more so. But in times of turmoil, listen, who better than us? This is what our mission is about, to help clients address challenges, to address unmet demand, find opportunities where we can, and frankly, we're serious about our mission. And we're going to always make investments to strengthen our capability on their behalf when they present themselves. And priority one for us is addressing the needs of our clients in a challenging world. And this is about this idea of relevance and building a more capable firm, and it's not about what's happening in the market today or next week. It's about what we're doing for them over the long term.

Our next question is coming from the line of Mark Marcon from Baird.

Both Willis and Aon have had lots of experiences with regards to transactions of this nature. I'm wondering, with the combined learnings, is there a possibility that some of the synergies that are anticipated could potentially come through a little bit faster?

Well, listen, we're hopeful. I think in the end, this is what's been so positive around sort of -- and I mean hopeful in terms of sort of what we can do together. Christa will comment on the timing specifically on the synergies in a second. But we're hopeful in terms of excited and expecting. There's tremendous knowledge. I mean just listening to John talk about sort of how Willis Towers Watson's come together beyond just the primary brands, but other support as well, been terrific. We bring a fair amount to the table also. But what we've agreed to, underpinning all this, is a principles-based approach against a common DNA and what we're trying to do to develop our talent across both firms. We think that's going to be inspiring for our colleagues around the world. We think they're going to see something here that, candidly, it's going to be better than anything we've done at Aon and hopefully better than anything's that sort of happened over time with Willis Towers Watson because our common set of colleagues are going to see something in it in terms of their ability to help clients that's different than anything before. So we have high expectations, and we'll see where we get to. But specifically on the timing of the synergies, Christa?

Yes. And look, I think it's a great question because we've had a lot of experience on both sides at delivering synergies and doing a very good job. We're very impressed with the Willis Towers Watson leadership team. And working through these synergies with them, we've become even more impressed. And so we do expect to deliver $800 million annualized pretax synergies by the third full year. We do expect them to come through exactly as we've outlaid, $267 million in year 1, $600 million in year 2 and $800 million in year 3. But we're really looking forward to working through this with Willis Towers Watson leadership team. It's an incredibly impressive team with great expertise and depth of experience in this area. So I think it's a great point.

Great. And then second follow-up question is Willis obviously has a lot of very attractive properties and practices. Was there any contemplation that anybody else might potentially enter into the fray given the attractiveness of Willis and how well it's regarded?

Well, I would just emphasize Christa's point, and John, certainly can comment as well. We have long admired the capability and colleagues around the world in the platform of Willis Towers Watson, and that's why we see the complementary nature of the 2 groups coming together and what we can do. Again, we have very high aspirations on what we're trying to do to support unmet client needs around the global economy. Our job is not even 1/4 done, not even 1/3 done, right? It's not done at all. We've got so much opportunity, and we think that's going to be pretty compelling for our clients. I think they're going to look at this -- and our aspiration is clients look back in 10 years and say, "This is actually -- this is a step. This is a step that made a meaningful difference in our industry's ability to help meet their needs." And many others will follow and benefit as well, but we believe our clients will see that as very important. And because of that, our colleagues, one of the things that's similar for all our colleagues around the world, whether they'd be at Aon or Willis Towers Watson, when you're helping clients exceed, that's always a good thing. That actually draws people together. So we see that as a real opportunity. And we hope that there's inspiration on both sides of this.

Yes. And so Greg, I'd just add. Mark, my view about mergers is that the 3 things you should think about in this order are: first, culture; and then strategy; and then the financials. And if I think about the culture, I mean, one of the things that's been so attractive to me and the rest of the Willis Towers Watson leadership and our Board is the shared vision that we have between Aon and between Willis Towers Watson. And when you look at things like the Aon United strategy, the Aon United brand, and when you look at the way Aon positions itself as a global professional service firm, that's exactly the direction we've been headed in, in Willis Towers Watson. So we look at this as joining up with a firm that shares the same thoughts about the culture and structure and it should be relatively easy. I mean as easy as these things ever are to do that. When I look at strategy, I talked earlier about the shared vision. And Greg and Christa and I have spoken on this call about the shared vision of the market and about the unmet client needs and about what we're building. And so when I look at those things, and I see how the 2 firms match up and why the deal is attractive, it's hard for me to imagine anybody else matching up in that way.

John, congratulations to you and the entire team.

Thanks, Mark.

Our next question is coming from the line of Tobey Sommer from SunTrust.

I was wondering if you could comment on the opportunity for direct-to-consumer facing businesses, which Willis Towers Watson recently entered into with TRANZACT, and what opportunities may be in front of the combined company.

Again, I'll offer an overview, John can chime in as well, maybe I will come back. We love -- when we saw the TRANZACT opportunity, we loved it then. We are learning more about it, love it even more. You saw us with CoverWallet, how we brought in a unique skill set and capability that we think will really kind of radiate across the firm in a way that will help our clients. And then our overall kind of analytic capability we have, we think, combined could even be better. So again, this is back to matching capital with risk. By the way, risk is retirement, investment, health, all aspects of that. And we can bring solutions and capital to bear and actually improve operating performance or strengthen balance sheet or reduce volatility, this is a wonderful thing, and we see opportunities across the spectrum on it.

Yes, I would agree with that, Greg. And I think if you think about the direct-to-consumer market, it's the kind of market that traditionally, it's been harder for firms like ours to address because of the capabilities you need. But in today's technology-enabled world, I think we're finding that this is a market that we can potentially address. So we're excited about that. I think one of the things that's particularly excited, whether you're talking about CoverWallet or whether you're talking about TRANZACT or any of these forays into the direct-to-consumer market, this is where innovation occurs first. It doesn't occur at the big companies in general. It occurs on the interactions with the individual and then you can scale that up. And so I think that's something that we're excited about for the new organization.

Elyse Greenspan from Wells Fargo will be our last question.

Just a couple of tie-up questions. My first question, why is it going to take over a year to close the transaction? Are you guys just being conservative in terms of the whole regulatory process?

Yes. So Elyse, the next steps for us are in a couple of months, we'll file a proxy, and then about sort of 6 months after that, we expect shareholder approval. And then it will take quite some time to get regulatory approval in all the countries. There's 10s of almost 100 countries that we require regulatory approval in. And so we feel confident about meeting the time period of first half of 2021, and we'll work hard to deliver that. But it does take time in all these different countries.

Okay. Great. And then my second question, Greg -- to Greg and Christa, you guys have both done a great job at Aon in terms of improving the free cash flow generation of the firm. Willis, that's obviously been a goal of the firm over the past couple of years. And obviously, that was pushed back a little bit in terms of their 2019 results and 2020 guide. Can you just give us a sense when you were going about to piece together this transaction, just the views that you have surrounding the free cash flow there and your ability to get that conversion higher to drive towards the metrics that you laid out in this transaction?

Yes. So Elyse, we absolutely thought about this transaction from a free cash flow point of view. It's how we evaluate all uses of the cash, as you know, and we're very focused on making sure that the combined firm has high recurring revenue and a focus on converting each dollar of revenue into the highest level of free cash flow. And we do expect that free cash flow will breakeven in year 2 and be accretive in year 3 and have accretion of over 10% after full realization of expected synergies. So it's a fantastic free cash flow story, which allows us to generate actual free cash flow going forward and allow us to disproportionately invest in new areas of innovation to clients. So we're really excited about that.

And I might just a couple of thoughts to that is really important, Elyse, as you highlight sort of what governs what we do and how we're doing it. And listen, it's been a privilege working with Christa for 15 -- going on 15 years around governing Aon. It really was 2 principles. 2 principles: delivering distinctive and sustainable value for clients, first and foremost, measured by -- by the way, their needs, not our competitors, not who's ahead with clients, but meeting the needs of clients in a very distinctive and sustainable way; and then operating in a manner in which delivers exceptional and increasing return on invested capital on a cash-on-cash basis. And you do that by the way by making opportunities available for colleagues that are absolutely unmatched. So that's how that all fits together. It's essentially, clients and colleagues, and colleagues are really absolutely paramount, sort of they're front and center in that process. And if you think over the years, we've made many structural steps. We've taken these -- that raised questions every time we take them by investors and others at the time. But ultimately, as you've highlighted, they've been meaningful in our development. Benfield or Hewitt or the outsourcing decision, we've done all these things that sort of have been structural changes in addition to continuing to operate the business better. And I would say, as we looked at it, and Christa and I looked at it, our team looked at it, our Board looked at it, we think this combination, this combination is going to be the most meaningful in our history in terms of accelerating our Aon United growth efforts in really ways that, in our view, no other single asset could do in any way, shape or form. No one could come close in terms of content, capability, talent, et cetera. And it really, in our view, is going to deliver exceptional value for shareholders, and it comes right back to return on invested capital, right back to free cash flow in every way, shape or form. And it really is, again, comes back to the value of addressing unmet needs on behalf of clients, which we think is exceptional. So a little long, but that's really what's governed this entire process. And we're -- as you can tell, and I think you can tell from John as well, we're all pretty excited about this.

That's helpful. One last question just to clarify on Slide 13 in terms of the accretion. I know you said that that was using, I believe, consensus estimates for the next couple of years for both companies. Is that using consensus EPS? Or are there some internal figures like tax rate that might vary from what The Street is projecting? I just want to make sure I understood that comment correctly.

Yes. So Elyse, the baseline derived for the accretion dilution impact was calculated using combined pro forma company projections, which represent our best estimates as of March 9, 2020. And these projections are based on the long-range plan for both companies as required by the Irish Takeover code. But they're generally consistent with analyst consensus estimates for the next 2 years and trended thereafter.

I would now like to turn the call back to Greg Case for closing remarks.

I just wanted to say again [Technical Difficulty] everybody for gathering on such short notice, we really appreciate it. I want to say [Technical Difficulty] for the next conversation. Sorry, I think I just got cut off there. No problem. Let me just try that again. It was brilliant, by the way, if you're wondering. I just wanted to say a couple of thank yous. One of the thank yous was to John for all you've done to help bring all this together, we truly, truly appreciate it. It's really been wonderful. And to our future Willis Towers Watson colleagues, truly looking forward to this journey together. And for our clients who might be listening in, this is about you. This is all about you, and we look forward to supporting you in any way we can. Thanks very much for being part of the call.

Thank you. And that concludes today's conference. Thank you, everyone, for joining. You may now disconnect.