When two giants in the insurance brokerage space agreed to a megamerger back in March 2020, the Department of Justice (DOJ) stepped in to take a closer look. Aon (AON -1.34%) and Willis Towers Watson (WLTW -0.23%) had come to a $30 billion merger agreement that would've created the world's largest insurance broker. The two insurers ended up calling off the deal late last month after the DOJ filed a lawsuit in June to stop the deal.
The merger shutdown is the latest example of the Biden administration's increasing scrutiny of big businesses this year, and it represents a change in attitude after years of lax antitrust enforcement. The increasing crackdown on deals with antitrust and anticompetitive implications could have ripple effects for a number of publicly traded companies.
An attempt to create the world's largest insurance broker
In 2020, representatives for Aon and Willis Towers Watson touted the $30 billion merger deal, saying it would have combined the resources and expertise of the two companies, and together they could better serve clients and accelerate growth for the new combined company.
The deal received approval from the European Commission and other jurisdictions globally. But it hit a snag in June 2021 when the DOJ filed a civil antitrust lawsuit. According to the DOJ, the merger would reduce competition in the insurance brokerage space, which could ultimately lead to higher prices for customers.
The primary focus of the DOJ was on Aon's U.S.-based businesses. Specifically, before the DOJ signed off on any deal, it wanted Aon to divest from its U.S. retirement unit and its U.S. retiree healthcare exchange. It also wanted Willis Tower Watson to divest from its global reinsurance business.
Would the DOJ's demands have "stifled innovation"?
Aon and Willis Tower Watson called off the merger in late July, with Aon CEO Gregory Case saying that the "demands made by the U.S. Department of Justice on our U.S. business would have stifled innovation and reduced our client-serving capability." He went on to say that a trial would have dragged into 2022 and that the company did not want to delay so long.
Aon management also said the divestments demanded by the DOJ would affect its ability to serve its clients. The decision to call off the deal wasn't a cheap one, as Aon paid a $1 billion termination fee to Willis Tower Watson and will incur another $350 million to $400 million in added charges as a result of the failed deal.
The DOJ's changing attitude toward antitrust matters
U.S. Attorney General Merrick Garland called the decision to call off the merger "a victory for competition and for American businesses, and ultimately, for their customers, employees and retirees across the country." He went on to say that American employees and retirees and their employers who rely on insurance brokers like Aon and Willis Tower Watson will benefit and that "the decision to abandon this anticompetitive merger will help preserve competition in insurance brokering."
Scrutiny from the DOJ toward businesses' anticompetitive behavior has ramped up under the Biden administration. Notably, the DOJ has put several big companies on notice for anticompetitive practices, including payment giants Visa, which called off its merger with Plaid earlier this year, and PayPal, which has come under scrutiny for fees paid to banks.
Not only that, but President Joe Biden signed an executive order last month cracking down on business and antitrust practices, marking a shift in attitude from prior administrations. The administration has also added lawyer Jonathan Kanter, a big tech critic, to lead the DOJ's antitrust division, which should have investors in Alphabet, Facebook, and Amazon on notice as well.
The DOJ has flexed its muscles, shutting down a couple of huge mergers already this year, and the increased scrutiny could be a sign of more regulation and lawsuits -- which could ultimately challenge what has been a hot mergers and acquisitions market. Investors should pay attention to the regulatory backdrop and understand how it could affect their investments, as investors in Aon and Willis Tower Watson learned firsthand this summer.