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10-Q - FORM 10-Q - Towers Watson & Co. | w76709e10vq.htm |
EX-31.2 - EX-31.2 - Towers Watson & Co. | w76709exv31w2.htm |
EX-32.1 - EX-32.1 - Towers Watson & Co. | w76709exv32w1.htm |
EX-32.2 - EX-32.2 - Towers Watson & Co. | w76709exv32w2.htm |
EX-31.1 - EX-31.1 - Towers Watson & Co. | w76709exv31w1.htm |
EXHIBIT 99.1
[Risk Factors section (pages 28-50) of the joint proxy statement/prospectus included in the
Registration Statement on Form S-4/A (File No. 333-161705) filed by Jupiter Saturn Holding Company
with the Securities and Exchange Commission, which was declared effective on November 9, 2009, as
supplemented by the prospectus supplement filed pursuant to Rule 424(b)(3) on December 14, 2009.]
RISK FACTORS
Risks Relating to the Merger
Because the merger consideration exchange ratios are fixed, the market value of the
Towers Watson common stock issued to you may be less than the value of your current
Towers Perrin or Watson Wyatt securities.
Towers Perrin security holders who receive shares in the merger will receive a fixed number of
shares of Towers Watson common stock to be calculated at the mergers closing based on the number
of Towers Perrin and Watson Wyatt shares outstanding on a fully diluted basis, rather than a number
of shares with a particular fixed market value (other than Guaranteed RSU Holders as defined and
discussed in The Merger Agreement Conversion of Stock, Stock Options and Other Awards).
Similarly, Watson Wyatt stockholders will receive a fixed number of shares of Towers Watson Class A
common stock (on a one-for-one basis) in the merger. Because the merger consideration exchange
ratios will not be adjusted to reflect any changes in the relative values of Towers Perrin and
Watson Wyatt, the values of Towers Watson common stock issued in the merger as compared to the
Towers Perrin and Watson Wyatt securities held before the merger may be higher or lower than the
values of these securities on earlier dates. The market price of Watson Wyatt Class A common stock
at the effective time may vary significantly from its price on the date the merger agreement was
executed, the date of this document or the date of the Watson Wyatt special meeting. If the merger
is consummated after December 31, 2009, the redemption value per share of Towers Perrin common
stock at the effective time may also vary significantly from the redemption value per share on the
date the merger agreement was executed, the date of this document and the date of the Towers Perrin
special meeting. You are urged to obtain up-to-date prices for Watson Wyatt Class A common stock.
See Selected Historical and Unaudited Pro Forma Financial Information for ranges of historic
prices of Towers Perrin common stock and Watson Wyatt Class A common stock.
Changes in stock price may result from a variety of factors, many of which are beyond the
control of Towers Perrin and Watson Wyatt, including changes in their businesses, operations and
prospects, regulatory considerations, governmental actions and legal proceedings. Market
assessments of the benefits of the merger and of the likelihood that the merger will be completed,
as well as general and industry-specific market and economic conditions, may also affect prices of
Watson Wyatt Class A common stock. Neither Towers Perrin nor Watson Wyatt is permitted to terminate
the merger agreement solely because of changes in the market price of Watson Wyatts Class A common
stock.
Your special meeting will be held before the merger is completed, and the shares of Towers
Watson Class A common stock will not trade publicly until after completion of the merger. As a
result, at the time of your special meeting, you will not know the market value of Towers Watson
common stock that you will receive upon completion of the merger.
The exact consideration to be received in the merger by the Class R Participants will
not be known when Towers Perrin shareholders vote on the merger agreement or Class R
Participants make their Class R election.
The Class R election available to Class R Eligible Participants is subject to proration as
described in The Merger Agreement The Class R and Class S Elections. The maximum number of
shares of Towers Watson Class R common stock that may be issued in the merger and the exact
consideration that the Class R Participants will receive will not be available at the time Towers
Perrin shareholders vote on the merger agreement or when Class R Participants make their Class R
election. In addition, the consideration that any particular Class R Participant will receive if he
or she makes a Class R election will also not be known at the time that he or she makes the Class R
election because the consideration will depend on the total number of shares of Towers Perrin
common stock that Class R Participants elect to convert into shares
of Towers Watson Class R common stock. If the Class R election is oversubscribed, Class R Participants
will receive fewer shares of Towers Watson Class R common stock, and more shares of Towers Watson
Class B-1 common stock, in exchange for their shares of Towers Perrin common stock than such Class
R Participants elected to receive, which could result in, among other things, tax consequences that
differ from those that would have resulted if the Class R election was not oversubscribed. See
Material Income Tax Considerations for a description of the U.S. federal income tax consequences
of the merger to Class R Participants. As noted elsewhere in this document, Towers Perrin and
Watson Wyatt believe the Class R election may be oversubscribed because the consideration received
by a Class R Participant will be more liquid than the consideration received by a Class R Eligible
Participant who decides not to or fails to make a valid Class R election. If the Class R election
is oversubscribed, then a Class R Participant would receive less cash and Towers Watson Notes (the
more liquid consideration) and more Towers Watson Class B-1 common stock (which automatically
converts into freely tradable Towers Watson Class A common stock in one year) than originally
elected.
The exact number of shares of Towers Watson restricted Class A common stock to be issued
in the merger with respect to Towers Perrin RSUs will not be known until immediately
prior to the effective time.
The number of shares of Towers Watson restricted Class A common stock to be issued with
respect to Towers Perrin RSUs (other than Towers Perrin RSUs issued to the Guaranteed RSU Holders)
will be increased or decreased, and the merger consideration to be received by each holder of
Towers Perrin RSUs (other than the Guaranteed RSU Holders) will be adjusted, pro rata based on the
number of Towers Perrin RSUs that he or she holds as necessary to ensure that the aggregate number
of shares of Towers Perrin RSUs (including the shares received by Guaranteed RSU Holders) equals
10% of the aggregate number of shares of Towers Watson common stock to be issued to Towers Perrin
security holders in the merger.
In order to determine what number of shares equal 10% of the aggregate number of shares of
Towers Watson common stock to be issued to Towers Perrin security holders in the merger, we must
calculate the Towers Perrin final exchange ratio to determine the number of shares of Towers Watson
Class B common stock to be received by holders of shares of Towers Perrin common stock. This
calculation is not done until immediately prior to the effective time. As a result, until such
time, it is not possible to calculate the aggregate number of shares of Towers Watson restricted
Class A common stock to be issued to holders of Towers Perrin RSUs that equals 10% the aggregate
number of shares of Towers Watson common stock to be issued to Towers Perrin security holders in
the merger.
Obtaining required approvals may delay or prevent completion of the merger or reduce the
anticipated benefits of the merger.
Completion of the merger is conditioned upon, among other things, the receipt of material
governmental authorizations, consents, orders and approvals, including approvals under competition
laws within the European Union. In connection with granting these approvals, governmental
authorities may impose conditions on, or require divestitures or other changes relating to, the
divisions, operations or assets of Towers Perrin and Watson Wyatt. Such conditions, divestitures or
other changes may jeopardize or delay completion of the merger or may reduce the anticipated
benefits of the merger. See The Merger Agreement Conditions to the Merger for a discussion of
the conditions to the completion of the merger and Towers Perrin Proposal No. 1 and Watson Wyatt
Proposal No. 1: The Merger Agreement Regulatory Requirements for a description of the
regulatory approvals necessary in connection with the merger.
If we are not able to successfully integrate the operations of Towers Perrin and Watson
Wyatt, the combined company may fail to realize the anticipated growth opportunities,
cost savings and other anticipated benefits of the merger.
Towers Perrin and Watson Wyatt operate as separate and independent companies, and will
continue to do so until the completion of the merger. Following the effective time, Towers Watson
management may face significant challenges in integrating the two companies technologies,
organizations, procedures, policies and operations, as well as in addressing any differences in the
business cultures of the two companies, and retaining key Towers Perrin and Watson Wyatt personnel.
The integration process may be complex and time consuming and require substantial resources and
effort. These efforts could divert
managements focus and resources from other strategic opportunities and from business
operations during the integration process. Difficulties may occur during the integration process,
including:
| Loss of key officers and employees; | ||
| Loss of key clients; | ||
| Loss of revenues; and | ||
| Increases in operating, tax or other costs. |
The success of the merger will depend in part on our ability to realize the anticipated growth
opportunities and cost savings from integrating the businesses of Towers Perrin and Watson Wyatt,
while minimizing or eliminating any difficulties that may occur. Even if the integration of the
businesses of Towers Perrin and Watson Wyatt is successful, it may not result in the realization of
the full benefits of the growth opportunities and cost savings that we currently expect or these
benefits may not be achieved within the anticipated time frame. Any failure to timely realize these
anticipated benefits could have a material adverse effect on the revenues, expenses and operating
results of Towers Watson.
In addition, Towers Watson must also integrate Watson Wyatts and Towers Perrins financial
reporting systems, including their respective internal control over financial reporting. This
process may pose challenges because Towers Perrin has not previously been subject to the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and the rules
promulgated thereunder by the SEC. If Towers Watson cannot successfully integrate the two
companies internal control over financial reporting, the reliability of Towers Watsons financial
statements may be impaired and Towers Watson may not be able to meet its reporting obligations
under applicable law. Any such impairment or failure could cause investor confidence and, in turn,
the market price of the Towers Watson Class A common stock, to be materially adversely affected.
The estimates of operational cost savings resulting from the merger and costs required
to achieve such savings are inherently uncertain and may not be accurate.
We anticipate that the merger will ultimately result in approximately $80 million in pretax
annual operational costs savings, primarily as a result of reductions in management headcount and
general and administrative expenses. While we expect to realize significant savings during the
first two years following completion of the merger, we anticipate that full realization of these
pretax annual operational cost savings will take three years to achieve. This figure does not
include other potential cost savings, including, in general, annual savings of approximately $41
million in compensation, benefits and other direct costs expected to result from retirement of
Class R Eligible Participants at the effective time. We also expect to incur approximately $80
million in one-time severance and IT integration costs in order to realize $80 million in annual
operational costs savings. These operational cost savings estimates are based on a number of
assumptions, including that Towers Watson will be able to implement cost saving programs such as
personnel reductions and consolidation of operations, technologies, and administrative functions.
In addition, our estimated expenses required to achieve operational costs savings do not include
certain other costs we expect Towers Watson to incur, including those relating to rebranding, lease
termination costs and facilities consolidation, among others. We may not be able to achieve the
operational cost savings that we anticipate in the expected timeframe, based on the expected costs
or at all. Failure to successfully implement cost savings programs on a timely basis, or the need
to spend more than anticipated to implement such programs, will result in lower than expected cost
savings in connection with the merger and could have a material adverse effect on the operating
results of Towers Watson.
The merger may cause dilution to Towers Watsons earnings per share as compared with
Watson Wyatts earnings per share, which may negatively affect the market price of
Towers Watsons Class A common stock.
Towers Perrin and Watson Wyatt currently anticipate that the merger will be accretive to
Towers Watsons diluted earnings per share within three years following the effective time, when
compared with Watson Wyatts earnings per share. This expectation is based on preliminary estimates
which may materially change. In particular, due to legal restrictions, Towers Perrin and Watson
Wyatt have
not been able to share certain competitively sensitive information regarding the integration
of the two companies. Towers Watson, Towers Perrin and Watson Wyatt could encounter additional
transaction and integration-related costs or other factors such as the failure to realize all of
the benefits anticipated in the merger. All of these factors could cause dilution to Towers
Watsons earnings per share compared with
Watson Wyatts earnings per share, or decrease or delay
the expected accretive effect of the merger and cause a decrease in the price of Towers Watsons
Class A common stock.
Failure to complete the merger could negatively impact Towers Perrin and Watson Wyatt
and their future operations.
If the merger is not completed for any reason, Towers Perrin and Watson Wyatt may be subjected
to a number of material risks. The price of Watson Wyatt Class A common stock may decline to the
extent that the current market price of Watson Wyatt Class A common stock reflects a market
assumption that the merger will be completed. If the board of directors of Towers Perrin or Watson
Wyatt determines to seek another business combination or the merger is not completed for any other
reason, the parties may risk losing key clients and employees. In addition, some costs related to
the merger, such as legal, accounting, filing, printing and mailing, must be paid by Towers Perrin
and Watson Wyatt whether or not the merger is completed.
A portion of the merger consideration received by Towers Perrin shareholders who make a
valid Class R election will be treated as ordinary compensation income.
Towers Perrin and Watson Wyatt have determined that a portion of the merger consideration
received by a Class R Participant who makes a valid Class R election should be treated as ordinary
compensation income to that Class R Participant and such portion will be taxable to such holder at
ordinary income rates and will be subject to applicable withholding taxes. The amount treated as
ordinary compensation income will be determined based on the difference in value between the merger
consideration that will be received by a Class R Participant who makes a valid Class R election
(i.e., cash, notes and Towers Watson Class B-1 common stock) and the merger consideration that will
be received by a Towers Perrin shareholder who does not or is not eligible to make a valid Class R
election. The Internal Revenue Service (which we refer to as the IRS) may disagree with the
determination of the portion treated as ordinary compensation income, in which case a Class R
Participant may be subject to increased tax.
For other reasons, a portion of the merger consideration received by certain Towers
Perrin shareholders (not limited to Towers Perrin shareholders who make a Class R
election) may be treated as ordinary compensation income.
The Towers Perrin bylaws include a requirement that Towers Perrin purchase a Towers Perrin
shareholders shares following the individuals termination of employment. Milbank, Tweed, Hadley &
McCloy LLP (or Milbank), counsel to Towers Perrin, will provide its opinion dated as of the
closing date that the elimination of the requirement that Towers Perrin common stock be repurchased
by Towers Perrin is not a compensatory cancellation of a nonlapse restriction. Such opinion is not
binding on the IRS and, accordingly, the IRS could take a contrary position. In addition,
compensation income could arise if some or all of a U.S. Holders (as defined in Material Income
Tax Considerations) Towers Perrin shares were treated as not substantially vested within the
meaning of Code Section 83 prior to the merger and such holder did not make a timely Section 83(b)
election with respect to such shares. In general, shares would not be treated as substantially
vested for this purpose if the shares were subject to a substantial risk of forfeiture. The
determination of whether any U.S. Holders Towers Perrin shares are subject to a substantial risk
of forfeiture as a result of the restrictions contained in the Towers Perrin bylaws or otherwise is
based on all the facts and circumstances applicable to such holder at the time that such shares
were acquired.
If some or all of a U.S. Holders Towers Perrin shares were not treated as substantially
vested prior to the merger and the U.S. Holder did not make a timely Section 83(b) election with
respect to those shares, the U.S. Holder would recognize compensation income with respect to such
shares at the time of the Towers Perrin merger. The amount of the compensation income recognized
could be substantial for individual holders. Any compensation income would be subject to U.S.
federal income tax at ordinary income tax rates in the year that the merger closes. Towers Perrin
intends to take the position that none of the consideration received in the Towers Perrin merger
constitutes ordinary compensation income (except
with respect to a portion of the merger consideration received by a Class R Participant). See
Material Income Tax Considerations Consequences of the Merger to U.S. Holders of Towers Perrin
Shares Potential Alternative Tax Characterization for Towers Perrin Shares Issued in Connection
with the Performance of Services for additional information.
Directors, executive officers and stockholders of Towers Perrin and Watson Wyatt may
have potential conflicts of interest in connection with the merger.
Some of the directors and executive officers of Towers Perrin and Watson Wyatt have interests
in the merger that are different from, or are in addition to, the interests of their respective
companys stockholders generally. These interests may create potential conflicts of interest. These
interests include positions as directors or executive officers of Towers Watson, potential benefits
under employment or benefit arrangements that may be available as a result of the merger, payment
or accelerated vesting of or distribution of rights or benefits under certain of their respective
compensation and benefit plans or arrangements as a result of the merger, potential severance and
other benefit payments in the event of termination of employment in connection with the merger, and
the right to continued indemnification and insurance coverage by Towers Watson for acts or
omissions occurring prior to the merger. See Towers Perrin Proposal No. 1 and Watson Wyatt
Proposal No. 1: The Merger Agreement Interests of Towers Perrins Directors, Executive Officers
and Principal Shareholders in the Merger and Towers Perrin Proposal No. 1 and Watson Wyatt
Proposal No. 1: The Merger Agreement Interests of Watson Wyatts Directors, Executive Officers
and Principal Stockholders in the Merger.
In recommending that their respective companys stockholders approve and adopt the merger
agreement, the boards of directors of Towers Perrin and Watson Wyatt were aware of these interests
and considered them in approving the transactions contemplated by the merger agreement.
The unaudited pro forma financial data included in this document are illustrative and
the actual financial position and results of operations of Towers Watson after the
merger may differ materially from the unaudited pro forma financial data included in
this document.
The unaudited pro forma financial data included in this document are presented solely for
illustrative purposes and are not necessarily indicative of what Towers Watsons actual financial
position or results of operations would have been had the merger been completed on the dates
indicated. The pro forma financial data reflect adjustments that were developed using preliminary
estimates based on currently available information and certain assumptions, and may be revised as
additional information becomes available. Accordingly, the final acquisition accounting adjustments
may differ materially from the pro forma adjustments reflected in this document. In addition, the
pro forma financial data have not been adjusted to give effect to certain expected financial
benefits of the merger, such as operational cost savings or the anticipated costs to achieve these
benefits, including, among others, charges against earnings or increases in tax expense resulting
from integration or restructuring activities after the merger closes, the final application of
purchase accounting and annual savings of approximately $41 million in compensation, benefits and
other direct costs expected to result from the retirement of Class R Eligible Participants at the
effective time. Neither the pro forma financial data, nor any interim period financial data
included in this document upon which the pro forma financial data are based, have been audited.
There will be material differences between the current rights of Towers Perrin security
holders and Watson Wyatt security holders and the rights they can expect to have as
Towers Watson stockholders.
Towers Perrin security holders and Watson Wyatt security holders who receive Towers Watson
common stock in the merger will become Towers Watson stockholders, and their rights as stockholders
will be governed by Towers Watsons certificate of incorporation and bylaws. In addition, while
Towers Perrin is currently a Pennsylvania corporation governed by the PBCL, Towers Watson will be a
Delaware corporation governed by the DGCL. There will be material differences among the current
rights of Towers Perrin security holders and Watson Wyatt stockholders and the rights they will
have as Towers Watson stockholders. For a discussion of other material differences, see Comparison
of the Rights of Towers Perrin, Watson Wyatt and Towers Watson Stockholders.
The opinion of Towers Perrins financial advisor contains certain limitations and
qualifications.
Goldman Sachs delivered its opinion to the Towers Perrin board of directors that, as of June
26, 2009 and based upon and subject to factors and assumptions set forth in its opinion, the Towers
Perrin final exchange ratio of Towers Watson Class B common stock pursuant to the merger agreement
was fair
from a financial point of view to the shareholders of Towers Perrin common stock. Goldman
Sachs did not express any view on, and its opinion did not address, any other term or aspect of the
merger agreement or the merger, including, without limitation, any Class R election or Class S
election or the consideration paid in respect of the redemption of shares of Towers Watson Class R
common stock or Towers Watson Class S common stock. See The Merger Agreement The Class R and
Class S Elections for information regarding the Class R election and the Class S election. In
addition, for purposes of rendering its opinion, Goldman Sachs did not take into account the terms
and conditions of any series of Towers Watson Class B common stock to the extent they differ from
the Towers Watson Class A common stock. See Description of Towers Watsons Common Stock for
information regarding the terms and conditions of each of the Towers Watson Class B common stock
and the Towers Watson Class A common stock. The Goldman Sachs opinion is not a recommendation as to
how any Towers Perrin shareholder should vote with respect to the merger agreement, or any other
matter, and should not be relied on beyond the express context in which it was provided.
Towers Perrin shareholders and Watson Wyatt stockholders will have a reduced ownership
and voting interest after the merger and will exercise less influence over management.
After the completion of the merger, all Towers Perrin shareholders and Watson Wyatt
stockholders will own a smaller percentage of Towers Watson as compared to the percentage they
currently own of Towers Perrin and Watson Wyatt, respectively. At the effective time, the Towers
Perrin security holders, on one hand, and the Watson Wyatt security holders, on the other hand,
each will be entitled to receive, in the aggregate, 50% of Towers Watsons voting common stock then
outstanding. Consequently, the Towers Perrin shareholders, as a group, and Watson Wyatt
stockholders, as a group, will each have reduced ownership and voting power in the combined company
as compared to their current ownership and voting power in Towers Perrin and Watson Wyatt,
respectively.
Significant transaction costs will be incurred as a result of the merger.
Towers Perrin and Watson Wyatt expect to incur significant one-time transaction costs, currently
estimated to be approximately $29.4 million and $20.1 million, respectively, related to the merger.
These transaction costs include investment banking, legal and accounting fees and expenses and
filing fees, printing expenses, proxy solicitation expenses and other related charges. The
companies may also incur additional unanticipated transaction costs in connection with the merger.
A portion of the transaction costs related to the merger will be incurred regardless of whether the
merger is completed. Additional costs will be incurred in connection with integrating the two
companies businesses, such as severance and IT integration expenses, which we expect will total
approximately $80 million, as well as other expenses, such as rebranding, facilities consolidation
and lease termination costs. Costs in connection with the merger and integration may be higher than
expected.
Failure to complete the merger in certain circumstances could require Towers Perrin or
Watson Wyatt to pay a termination fee or expenses.
If the merger agreement is terminated under certain circumstances discussed more fully in The
Merger Agreement Termination Fees; Expenses, Towers Perrin or Watson Wyatt, as the case may be,
could be obligated to pay the other party a $65 million termination fee, or reimburse the other for
expenses up to a maximum amount of $10 million. Payment of the termination fee could materially
adversely affect such companys results of operations or financial condition.
Towers Perrin is a defendant in a putative class action lawsuit.
On November 5, 2009, Towers Perrin, members of its board of directors, and certain members of
senior management were named as defendants in a putative class action filed in the United States
District Court for the Eastern District of Pennsylvania. The plaintiffs in the actionAlan H.
Dugan, Ronald P. Giesinger, Marvin H. Greene, John G. Kneen, John T. Lynch, Bruce R. Pittenger, J.
Russell Southworth, C. Roland Stichweh, Jacobus J. Van de Graaf and John C. Von Hagenare former members of the firms
senior management, who voluntarily retired from Towers Perrin at various times between 1995 and
2000. Pursuant to the corporations bylaws as then in effect, the Towers Perrin shares held by each
of these plaintiffs were redeemed by Towers Perrin at book value upon their retirement. The
plaintiffs purport to sue on behalf of themselves and a class of former Towers Perrin shareholders
who separated from service on or after January 1, 1971, whose shares were redeemed upon retirement,
and who otherwise meet certain
specified criteria. The complaint alleges that by agreeing to sell
their shares back to Towers Perrin at book value upon retirement, the plaintiffs and other members
of the putative class relied upon a commitment that Towers Perrin would remain privately owned in
perpetuity, which commitment, they allege, will be violated by the consummation of the merger. The
complaint asserts claims for breach of contract, breach of express trust, breach of fiduciary duty,
promissory estoppel, quasi-contract/unjust enrichment, and constructive trust, and seeks equitable
relief including an accounting, disgorgement, rescission and/or restitution, and the imposition of
a constructive trust. Although the complaint does not contain a quantification of the damages
sought, plaintiffs settlement demand, which was orally communicated on December 8, 2009 and later
in writing on December 9, 2009, sought a payment of $800 million to settle the action on behalf of
the entire class as defined in the complaint, and requested that the settlement demand be
communicated to Watson Wyatt. Towers Perrin believes the claims are without merit and intends to
vigorously defend the action. Towers Perrin and/or Towers Watson could incur significant costs
defending against this claim. The outcome of this legal proceeding is inherently uncertain and
could be unfavorable to Towers Perrin and/or Towers Watson.
Risks Relating to Towers Watsons Business
The loss of key employees could damage or result in the loss of client relationships and
could result in such employees competing against Towers Watson.
Towers Watsons success will depend on its ability to attract, retain and motivate qualified
personnel generally, including key management personnel and employees. In addition, Towers Watsons
success will largely depend upon the business generation capabilities of, and quality of services
provided by, its employees. In particular, Towers Watsons employees personal relationships with
its clients will be a critical element of obtaining and maintaining client engagements. Losing
employees who manage substantial client relationships or possess substantial experience or
expertise could materially adversely affect Towers Watsons ability to secure and complete
engagements, which would materially adversely affect Towers Watsons results of operations and
prospects. In addition, if any of Towers Watsons key employees were to join an existing competitor
or form a competing company, existing and potential clients could choose to use the services of
that competitor instead of Towers Watsons services.
There can be no assurance that confidentiality and non-solicitation/non-competition agreements
signed by senior employees who were former Towers Perrin or Watson Wyatt employees before the
merger, or agreements signed by Towers Watson employees in the future, will be effective in
preventing a loss of business.
Towers Perrin shareholders are subject to covenants contained in Section 6.18 of Towers
Perrins bylaws regarding the solicitation of Towers Perrin clients. Currently, if a Towers Perrin
shareholder does not comply with these restrictions after his or her employment terminates, Towers
Perrin has the right to withhold payment of a portion of the redemption price owed to the
shareholder for his or her Towers Perrin shares. After the merger, Towers Perrin will no longer
have this right as Towers Perrin employees who become Towers Watson stockholders will not be
required to sell their Towers Watson shares to Towers Watson if they cease to be employed by Towers
Perrin. Without the deterrent effect of the risk of forfeiting their right to such cash payments,
Towers Perrin shareholder employees may be more likely to breach these non-competition and
non-solicitation covenants following the merger. If any key employees breach these non-competition
and non-solicitation covenants and join an existing competitor or form a competing company,
existing and potential clients could choose to use the services of a competitor instead of Towers
Watsons services. Although we believe the non-competition and non-solicitation covenants will
continue to impose restrictions on the former Towers Perrin shareholders after the effective time,
there is a risk, as is currently the case, that the Towers Perrin bylaw provisions, as well as
Watson Wyatts non-compete agreements, could be held unenforceable in particular situations and
jurisdictions. If such provisions were held to be unenforceable and former Towers Perrin and Watson
Wyatt employees were permitted to compete with Towers Watson, such events could have a material adverse effect
on Towers Watsons business.
As a condition to making a valid Class R election, a Class R Participant must agree to
terminate his or her employment with Towers Perrin on or before the 30th day following the
effective time (unless another time is agreed to by the Towers Watson Executive Committee) and
enter into a confidentiality and non-solicitation agreement that prevents such shareholder from
soliciting employees or
clients of Towers Perrin, Watson Wyatt or Towers Watson for two years
following termination of employment. Clients who worked with these Class R Participants may choose
to use the services of a competitor instead of Towers Watsons services. In addition, if any of the
Class R Participants were to join an existing competitor or form a competing company, existing and
potential clients could choose to use the services of that competitor instead of Towers Watsons
services.
Changes in Towers Watsons compensation structure relative to each of Towers Perrins
and Watson Wyatts current compensation structures could impair Towers Watsons ability
to retain certain current employees of each of Towers Perrin and Watson Wyatt.
In order to meet Towers Watsons operating margin goals and increase its level of retained
earnings, following the merger, Towers Watson may change Towers Perrins and Watson Wyatts
respective compensation structures. In particular, Towers Perrin, as a private company, has not
retained a significant amount of annual earnings, resulting in significant flexibility to vary its
levels of cash compensation. We expect Towers Watsons compensation practices after the effective
time to be different than Towers Perrins current practices, because a larger proportion of
earnings will be retained compared to Towers Perrins historical practice, which may affect, in
particular, Towers Watsons ability to retain current employees of Towers Perrin accustomed to the
existing compensation structure of Towers Perrin as a private company. Any changes in compensation
structure could materially adversely affect Towers Watsons ability to retain current Towers Perrin
and Watson Wyatt employees if they do not perceive Towers Watsons total compensation program to be
competitive with those of other firms.
Towers Watsons clients could terminate or reduce its services at any time, which could
decrease employee utilization, adversely impacting Towers Watsons profitability and
results of operation.
Towers Watsons clients generally will be able to terminate or reduce Towers Watsons engagements
at any time. If a client reduces the scope of, or terminates the use of, Towers Watsons services
with little or no notice, Towers Watsons employee utilization will decline. In such cases, Towers
Watson will have to rapidly re-deploy its employees to other engagements (if possible) in order to
minimize the potential negative impact on Towers Watsons financial performance. In addition,
because it is expected that a sizeable portion of Towers Watsons work will be project-based rather
than recurring in nature, Towers Watsons employees utilization will depend on Towers Watsons
ability to continually secure additional engagements.
Current clients of Towers Perrin and Watson Wyatt may terminate the services of Towers
Perrin or Watson Wyatt, which could adversely impact Towers Watsons profitability and
results of operation.
Current clients of Towers Perrin and Watson Wyatt, who are expected to become clients of
Towers Watson, may terminate the services of Towers Perrin or Watson Wyatt prior to the effective
time for various reasons, including as a result of the announcement of the merger or because of
perceived conflicts resulting from the combination of the two companies. If a sufficient number of
clients reduce the scope of, or terminate the use of, Towers Perrins or Watson Wyatts services
prior to the effective time, these terminations could adversely impact Towers Watsons
profitability and results of operation.
Improper management of Towers Watsons engagements could hurt Towers Watsons financial
results.
If Towers Watson does not properly negotiate the price and manage the performance of its
engagements, Towers Watson might incur losses on individual engagements and experience lower profit
margins and, as a result, Towers Watsons overall financial results could be materially adversely
affected.
The trend of employers shifting from defined benefit plans to defined contribution plans
could materially adversely affect Towers Watsons business and its operating results.
Towers Watson will provide clients with actuarial and consulting services relating to both
defined benefit and defined contribution plans. Defined benefit pension plans generally require
more actuarial services than defined contribution plans because defined benefit plans typically
involve large asset pools, complex calculations to determine employer costs, funding requirements
and sophisticated analysis to match liabilities and assets over long periods of time. If
organizations shift to defined contribution plans
more rapidly than we anticipate, Towers Watsons
business operations and related operating results will be materially adversely affected.
Towers Watsons business will be negatively affected if it is not able to anticipate and
keep pace with rapid changes in government regulations or if government regulations
decrease the need for Towers Watsons services.
A material portion of Towers Watsons revenue will be affected by statutory changes. Many
areas in which Towers Watson will provide services are the subject of government regulation which
is constantly evolving. Changes in government and accounting regulations in the United States and
the United Kingdom, two of Towers Watsons principal geographic markets, affecting the value, use
or delivery of benefits and human capital programs, including changes in regulations relating to
health care (such as medical plans), defined contribution plans (such as 401(k) plans), defined
benefit plans (such as pension plans) or executive compensation, may materially adversely affect
the demand for Towers Watsons services. Changes to insurance regulatory schemes, or Towers
Watsons failure to keep pace with such changes, could negatively affect demand for services in
Towers Watsons Risk and Financial Services business group. For example, Towers Watsons continuing
ability to provide reinsurance intermediary services depends on compliance with the rules and
regulations in each of these jurisdictions. Any failure to comply with these regulations could lead
to disciplinary action, including compensating clients for loss, the imposition of fines or the
revocation of the authorization to operate as well as damage to Towers Watsons reputation.
In addition, Towers Watson will have significant operations throughout the world, which will
further subject it to applicable laws and regulations of countries outside the United States and
the United Kingdom. Changes in legislation or regulations and actions by regulators in particular
countries, including changes in administration and enforcement policies, could require operational
improvements or modifications, which may result in higher costs or hinder Towers Watsons ability
to operate its business in those countries.
If Towers Watson is unable to adapt its services to applicable laws and regulations, its
ability to provide effective services in these areas will be substantially diminished.
Towers Watsons business could be negatively affected by currently proposed or future
legislative or regulatory activity concerning compensation consultants.
Recent legislative and regulatory activity in the United States has focused on the
independence of compensation consultants retained to provide advice to compensation committees of
publicly-traded companies. For example, on July 31, 2009, the U.S. House of Representatives passed
H.R. 3269, the Corporate and Financial Institution Compensation Fairness Act of 2009, which
requires any compensation consultant or other similar advisor to the compensation committee of a
listed company to meet standards for independence to be established by SEC regulation. Companies
that violate this requirement would be prohibited from listing any class of equity security with
the national securities exchanges and associations. In addition, the SEC recently proposed rules
that, if adopted, would result in a number of changes to required proxy disclosures, including
enhanced disclosure relating to compensation consultants and potential conflicts of interest. The
SEC proposed rules that require disclosure of fees paid to compensation consultants as well as a
description of any additional services provided to the issuer by the compensation consultant or its
affiliates and the aggregate fees paid for such additional services. Due in part to these
legislative and regulatory changes, some clients of Towers Perrin and Watson Wyatt have decided to
terminate their relationships with the respective company (either with respect to compensation
consulting services or with respect to other consulting services) to avoid perceived or potential
conflicts of interest. Additional clients of Towers Perrin and Watson Wyatt may decide to terminate
their relationship with the respective company and, as a result, Towers Watsons business,
financial condition and results of operations could be materially adversely affected. Such
legislative and regulatory activities may also result
in certain Towers Watson consultants terminating their employment and competing with Towers
Watson for the business of clients that have or may terminate their executive compensation
consulting relationships with Towers Perrin and/or Watson Wyatt, or may terminate their
relationships with Towers Watson. Any such talent migration could have a material adverse effect on
Towers Watsons business.
Competition from firms with greater resources could result in loss of Towers Watsons
market share and reduced profitability.
The markets for Towers Watsons principal services are highly competitive. Towers Watsons
competitors will include other human capital and risk management consulting and actuarial firms, as
well as the human capital and risk management divisions of diversified professional services,
insurance, brokerage and accounting firms. Some of Towers Watsons competitors have greater
financial, technical and marketing resources than Towers Watson will have, which could enhance
their ability to finance acquisitions, fund internal growth and respond more quickly to
professional and technological changes. Some competitors may have or may develop a lower cost
structure. New competitors or alliances among competitors could emerge, creating additional
competition and gaining significant market share. In order to respond to increased competition and
pricing pressure, Towers Watson might have to lower its prices, which would have an adverse effect
on Towers Watsons revenues and profit margin.
Consolidation in the industries that Towers Watson is expected to serve could materially
adversely affect its business.
Companies in the industries that Towers Watson is expected to serve may seek to achieve economies
of scale and other synergies by combining with or acquiring other companies. If two or more of
Towers Watsons clients merge or consolidate and combine their operations, Towers Watson may
experience a decrease in the amount of services it performs for these clients. If one of Towers
Watsons clients merges or consolidates with a company that relies on another provider for its
services, Towers Watson may lose work from that client or lose the opportunity to gain additional
work. The increased market power of larger companies could also increase pricing and competitive
pressures on Towers Watson. Any of these possible results of industry consolidation could
materially adversely affect Towers Watsons revenues and profits. Towers Watsons reinsurance
intermediary business is especially susceptible to this risk given the limited number of insurance
companies seeking reinsurance and reinsurance providers in the marketplace.
Towers Watson will be subject to risks of doing business internationally.
A sizeable portion of Towers Watsons business will be located outside of the United States.
As a result, a significant portion of Towers Watsons business operations will be subject to
foreign financial, tax and business risks, which could arise in the event of:
| Currency exchange rate fluctuations; | ||
| Unexpected increases in taxes or changes in U.S. or foreign tax laws; | ||
| Compliance with a variety of international laws, such as data privacy, employment, trade barriers and restrictions on the import and export of technologies, as well as U.S. laws affecting the activities of U.S. companies abroad, including the Foreign Corrupt Practices Act of 1977 and sanctions programs administered by the U.S. Department of Treasury Office of Foreign Assets Control; | ||
| Absence in some jurisdictions of effective laws to protect Towers Watsons intellectual property rights; | ||
| New regulatory requirements or changes in policies and local laws that materially affect the demand for Towers Watsons services or directly affect Towers Watsons foreign operations; | ||
| Local economic and political conditions, including unusual, severe, or protracted recessions in foreign economies; | ||
| The length of payment cycles and potential difficulties in collecting accounts receivable, particularly in light of the increasing number of insolvencies in the current economic environment and the numerous bankruptcy laws to which they are subject; | ||
| Unusual and unexpected monetary exchange controls; or | ||
| Civil disturbance or other catastrophic events that reduce business activity in other parts of the world. |
These factors may lead to decreased sales or profits and therefore may have a material adverse
effect on Towers Watsons business, financial condition and operating results.
Towers Watsons inability to successfully recover should it experience a disaster or
other business continuity problem could cause material financial loss, loss of human
capital, regulatory actions, reputational harm or legal liability.
Should Towers Watson experience a disaster or other business continuity problem, such as an
earthquake, hurricane, terrorist attack, pandemic, security breach, power loss, telecommunications
failure or other natural or man-made disaster, Towers Watsons continued success will depend, in
part, on the
availability of its personnel, its office facilities, and the proper functioning of
its computer, telecommunication and other related systems and operations. In such an event, Towers
Watsons operational size and the multiple locations from which it will operate could provide
Towers Watson with an important advantage. Nevertheless, Towers Watson could still experience near
term operational challenges with regard to particular areas of its operations.
Towers Watsons ability to recover from any disaster or other business continuity problem will
depend on its ability to protect its technology infrastructure against damage from business
continuity events that could have a significant disruptive effect on Towers Watsons operations.
Towers Watson could potentially lose client data or experience material adverse interruptions to
its operations or delivery of services to its clients in a disaster.
Towers Watson will regularly assess and take steps to improve upon its business continuity
plans and key management succession. However, a disaster on a significant scale or affecting
certain of Towers Watsons key operating areas within or across regions, or its inability to
successfully recover should Towers Watson experience a disaster or other business continuity
problem, could materially interrupt Towers Watsons business operations and cause material
financial loss, loss of human capital, regulatory actions, reputational harm, damaged client
relationships or legal liability.
Demand for Towers Watsons services could decrease for various reasons, including a
continued general economic downturn, a decline in a clients or an industrys financial
condition or prospects, or a decline in defined benefit pension plans that could
materially adversely affect Towers Watsons operating results.
Towers Watson can give no assurance that the demand for its services will grow or that Towers
Watson will compete successfully with its existing competitors, new competitors or its clients
internal capabilities. Towers Watsons clients demand for its services may change based on their
own needs and financial conditions.
Towers Watsons results of operations will be affected directly by the level of business
activity of Towers Watsons clients, which in turn will be affected by the level of economic
activity in the industries and markets that they serve. Economic slowdowns in some markets,
particularly in the United States, have caused and may continue to cause reduction in discretionary
spending by Towers Watsons clients, result in longer client payment terms, an increase in late
payments by clients and an increase in uncollectible accounts receivable, each of which may reduce
the demand for Towers Watsons services, increase price competition and adversely impact Towers
Watsons growth and profit margins. If Towers Watsons clients enter bankruptcy or liquidate their
operations (which has already happened with some of the current clients of Towers Perrin and Watson
Wyatt), Towers Watsons revenues could be materially adversely affected.
The current economic conditions have adversely impacted Towers Perrins and Watson Wyatts
results of operations, cash flow and financial position, which are lower than previously
anticipated. For example, on August 13, 2009, Watson Wyatt announced that its revenues for the
fourth quarter of fiscal 2009 were $396.5 million, a decrease of 13% (a decrease of 4% constant
currency) compared to revenues of $435.8 million for the fourth quarter of fiscal 2008. Similarly,
Towers Perrins revenues for the six months ended June 30, 2009 were $758.7 million, a decrease of
15.0% (a decrease of 7.5% constant currency) compared to revenues of $892.1 million for the six
months ended June 30, 2008; based on current estimates, Towers Perrin believes this trend will
continue, on a constant currency basis, at least through the end of calendar year 2009. There can
be no assurance that continuing weakening economic conditions throughout the world will not
adversely impact Towers Watsons results of operations, cash flow, financial position or prospects.
In addition, the demand for many of Towers Watsons core benefit services, including
compliance-related services will be affected by government regulation and taxation of employee
benefit plans. Significant changes in tax or social welfare policy or regulations could lead some
employers to discontinue their employee benefit plans, including defined benefit pension plans,
thereby reducing the demand for Towers Watsons services. A simplification of regulations or tax
policy also could reduce the need for Towers Watsons services.
Demand for Towers Watsons services could also be negatively impacted by harm to its
reputation, which could occur for a variety of reasons, many of which will be outside Towers
Watsons control.
Towers Watsons quarterly revenues could fluctuate while Towers Watsons expenses are
expected to be relatively fixed.
Quarterly variations in Towers Watsons revenues and operating results could occur as a result
of a number of factors, such as:
| The significance of client engagements commenced and completed during a quarter; | ||
| The seasonality of certain types of services. For example, Watson Wyatts retirement revenues typically are more heavily weighted toward the first and fourth quarters of the calendar year, when annual actuarial valuations are required to be completed for calendar year end companies and the related services are performed; | ||
| The number of business days in a quarter, employee hiring and utilization rates and clients ability to terminate engagements without penalty; | ||
| The size and scope of assignments; and | ||
| General economic conditions. |
A sizeable portion of Towers Watsons total operating expenses are expected to be relatively
fixed, encompassing the majority of administrative, occupancy, communications and other expenses,
depreciation and amortization, and salaries and employee benefits excluding fiscal year end
incentive bonuses. Therefore, a variation in the number of client assignments or in the timing of
the initiation or the completion of client assignments can cause significant variations in
quarterly operating results and could result in losses.
Reinsurance intermediary revenue is influenced by factors that will be beyond Towers
Watsons control, and volatility or declines in premiums or other trends in the
insurance and reinsurance markets could significantly undermine the profitability of
Towers Watsons reinsurance intermediary business.
Towers Watson is expected to derive approximately 5% of its consolidated revenue from its
reinsurance intermediary business, which in turn will derive a majority of its revenue from
commissions. Revenue earned in Towers Watsons capacity as a reinsurance intermediary will be based
in large part on the rates that the global reinsurance marketplace prices for risks. For example,
Towers Watson will not determine reinsurance premiums on which commissions are generally based.
Premiums are cyclical in nature and may vary widely based on market conditions. When premium
rates decline, the commission and fees earned for placing certain reinsurance contracts and
programs also tend to decrease. When premium rates rise, Towers Watson may not be able to earn
increased revenue from providing intermediary services because clients may purchase less
reinsurance, there may be less reinsurance capacity available, or clients may negotiate a reduction
to the compensation rate or a reduced fee for Towers Watsons services.
To the extent Towers Watsons clients are or become materially adversely affected by declining
business conditions in the current economic environment, they may choose to limit their purchases
of insurance and reinsurance coverage, as applicable, which would inhibit Towers Watsons ability
to generate commission revenue, and may decide not to utilize Towers Watsons risk management
services, which would inhibit Towers Watsons ability to generate fee revenue.
Towers Watson will advise or act on behalf of clients regarding investments whose
results are not guaranteed.
Towers Watson will provide advice on both asset allocation and selection of investment
managers. For some clients, Towers Watson will be responsible for making decisions on both these
matters. Asset classes may experience poor absolute performance, and investment managers may
underperform their benchmarks; in both cases the investment return shortfall can be significant.
Clients experiencing this underperformance may assert claims against Towers Watson and claims may
be for significant amounts. Defending against these claims can involve potentially significant
costs, including legal defense costs. Towers Watsons ability to limit its potential liability may
be limited in certain
jurisdictions or in connection with claims involving breaches of fiduciary duties or other alleged
errors or omissions.
Towers Watson investment activities may require specialized operational competencies.
For certain clients, Towers Watson will be responsible for some portions of cash and investment
management including rebalancing of investment portfolios and guidance to third parties on
structure of derivatives and securities transactions. Failure of Towers Watson to properly execute
its role can cause monetary damage to such third parties for which Towers Watson might be found
liable and claims may be for significant amounts. Defending against these claims can involve
potentially significant costs, including legal defense costs. Towers Watsons ability to limit its
potential liability may be constrained in certain jurisdictions.
Towers Watsons growth strategy will depend, in part, on its ability to make
acquisitions, and if Towers Watson has difficulty in acquiring, overpays for, or is
unable to acquire other businesses, its business may be materially adversely affected.
Towers Watsons growth will depend in part on its ability to make acquisitions. Towers Watson
may not be successful in identifying appropriate acquisition candidates or consummating
acquisitions on terms acceptable or favorable to it, on the proposed timetables, or at all. Towers
Watson also will face additional risks related to acquisitions, including that it could overpay for
acquired businesses and that any acquired business could significantly underperform relative to its
expectations. If Towers Watson is unable to identify and successfully make acquisitions, its
business could be materially adversely affected.
Towers Watson will face risks when it acquires businesses, and may have difficulty
integrating or managing acquired businesses, which may harm Towers Watsons business,
financial condition, results of operations or reputation.
Towers Watson may acquire other companies in the future.
Towers Watson cannot be certain that its acquisitions will be accretive to earnings or
otherwise meet its operational or strategic expectations. Acquisitions involve special risks,
including the potential assumption of unanticipated liabilities and contingencies and difficulties
in integrating acquired businesses, and acquired businesses may not achieve the levels of revenue,
profit or productivity Towers Watson anticipates or otherwise perform as Towers Watson expects. In
addition, if the operating performance of an acquired business deteriorates significantly, Towers
Watson may need to write down the value of the goodwill and other acquisition-related intangible
assets recorded on its balance sheet.
Towers Watson may be unable to effectively integrate an acquired business into its
organization, and may not succeed in managing such acquired businesses or the larger company that
results from such acquisitions. The process of integration of an acquired business may subject
Towers Watson to a number of risks, including:
| Diversion of management attention; | ||
| Amortization of intangible assets, adversely affecting Towers Watsons reported results of operations; | ||
| Inability to retain the management, key personnel and other employees of the acquired business; | ||
| Inability to establish uniform standards, controls, systems, procedures and policies; | ||
| Inability to retain the acquired companys clients; | ||
| Exposure to legal claims for activities of the acquired business prior to acquisition; and | ||
| Incurrence of additional expenses in connection with the integration process. |
If acquisitions are not successfully integrated, Towers Watsons business, financial condition
and results of operations could be materially adversely affected, as well as its professional
reputation.
Damage to Towers Watsons reputation could damage its businesses.
Maintaining a positive reputation will be critical to Towers Watsons ability to attract and
maintain relationships with clients and employees. Damage to Towers Watsons reputation could
therefore cause significant harm to its business and prospects. Harm to Towers Watsons reputation
can arise from numerous
sources, including, among others, employee misconduct, litigation or regulatory action,
failing to
deliver minimum standards of service and quality, compliance failures and unethical
behavior. Negative publicity regarding Towers Watson, whether or not true, may also result in harm
to Towers Watsons prospects.
Towers Watson could also suffer significant reputational harm if Towers Watson fails to
properly identify and manage potential conflicts of interest. The failure or perceived failure to
adequately address, conflicts of interest could affect the willingness of clients to deal with
Towers Watson, or give rise to litigation or enforcement actions. There can be no assurance that
conflicts of interest will not arise in the future that could cause material harm to Towers Watson.
Towers Watson could be subject to claims arising from its work, as well as government
inquiries and investigations, which could materially adversely affect Towers Watsons
reputation and business.
Professional services providers, including those in the human capital and risk management
sectors such as Towers Perrin and Watson Wyatt, are subject to claims by their clients. Clients who
may become dissatisfied with Towers Watsons services or clients and third parties who claim they
suffered damages caused by Towers Watsons services may bring lawsuits against Towers Watson. The
nature of Towers Watsons work, particularly its actuarial services, necessarily will involve the
use of assumptions and the preparation of estimates relating to future and contingent events, the
actual outcome of which Towers Watson cannot know in advance. Towers Watsons actuarial services
will also rely on substantial amounts of data provided by clients, the accuracy and quality of
which Towers Watson cannot ensure. In addition, Towers Watson could make computational, software
programming or data management errors in connection with the services it provides to clients.
Clients may seek to hold Towers Watson responsible for the financial consequences of variances
between assumptions and estimates and actual outcomes or for errors. For example, clients may make:
| Claims that actuarial assumptions were unreasonable or that there were computational errors leading to pension plan underfunding or under-reserving for insurance claim liabilities; | ||
| Claims of failure to review adequately or detect deficiencies in data, which could lead to an underestimation of pension plan or insurance claim liabilities; and | ||
| Claims that employee benefit plan documents were misinterpreted or plan amendments were faulty, leading to unintended plan benefits or overpayments to beneficiaries. |
Given that Towers Watson frequently will work with large pension funds and insurance
companies, relatively small percentage errors or variances can create significant financial
variances and result in significant claims for unintended or unfunded liabilities. The risks from
such variances or errors could be aggravated in an environment of declining pension fund asset
values and insurance company capital levels. In almost all cases, Towers Watsons exposure to
liability with respect to a particular engagement will be substantially greater than the revenue
opportunity that the engagement will generate for Towers Watson.
In the case of liability for pension plan actuarial errors, a clients claims might focus on
the clients alleged reliance that actuarial assumptions were reasonable and, based on such
reliance, the client made benefit commitments the client may later claim are not affordable or
funding decisions that result in plan underfunding if and when actual outcomes vary from actuarial
assumptions.
Defending lawsuits arising out of any of Towers Watsons services could require substantial
amounts of management attention, which could affect managements focus on operations, adversely
affect Towers Watsons financial performance and result in increased insurance costs or a reduction
in the amount of available insurance coverage. In addition to defense costs and liability exposure
which may be significant, claims may produce negative publicity that could hurt Towers Watsons
reputation and business.
Finally, Towers Watson may be subject to inquiries and investigations by federal, state or
other governmental agencies regarding aspects of its business, especially regulated businesses such
as its broker dealer and investment advisory services. Such inquiries or investigations may consume
significant management time and result in significant legal fees.
Towers Watsons reinsurance intermediary business could be subject to claims arising
from its work, which could materially adversely affect Towers Watsons reputation and
business.
Towers Watsons reinsurance intermediary business may be subject to claims brought against it
by clients or third parties. Clients are likely to assert claims if they fail to make full
recoveries in respect of their
own claims. If reinsurers with whom Towers Watson places business for its clients become
insolvent or otherwise fail to make claims payments, this may also result in claims against Towers
Watson.
Towers Watsons reinsurance business will assist its clients in placing reinsurance and
handling related claims, which could involve substantial amounts of money. If Towers Watsons work
results in claims, claimants may seek large damage awards and defending these claims can involve
potentially significant costs. Claims could, by way of example, arise as a result of Towers
Watsons reinsurance intermediaries failing to:
| Place the reinsurance coverage requested by the client; | ||
| Report claims on a timely basis or as required by the reinsurance contract or program; | ||
| Communicate complete and accurate information to reinsurers relating to the risks being reinsured; or | ||
| Appropriately model or advise Towers Watsons clients in relation to the extent and scope of reinsurance coverage that is advisable for a clients needs. |
Moreover, Towers Perrins reinsurance intermediary contracts, generally do not limit the
maximum liability to which Towers Perrin, as a subsidiary of Towers Watson, may be exposed for
claims involving alleged errors or omissions.
Towers Watson may be engaged in providing services outside of the core human capital and
risk management business currently conducted by Towers Perrin and Watson Wyatt, which
may carry greater risk of liability.
Towers Watson intends to continue to grow the business of providing professional services to
institutional investors and financial services companies. The risk of claims from these lines of
business may be greater than from Towers Watsons core human capital and risk management business
and claims may be for significant amounts. For example, Towers Watson may assist a pension plan to
hedge its exposure to changes in interest rates. If the hedge does not perform as expected, Towers
Watson could be exposed to claims. Contractual provisions intended to mitigate risk may not be
enforceable.
Towers Watsons business will face rapid technological change and Towers Watsons
failure to respond to this change quickly could materially adversely affect Towers
Watsons business.
To remain competitive in Towers Watsons practice areas, Towers Watson will have to identify
and offer the most current technologies and methodologies. In some cases, significant technology
choices and investments are required. If Towers Watson does not respond correctly, quickly or in a
cost-effective manner, Towers Watsons business and operating results might be harmed.
The effort to gain technological expertise and develop new technologies in Towers Watsons
business may require Towers Watson to incur significant expenses and, in some cases, to implement
these new technologies globally. If Towers Watson cannot offer new technologies as quickly or
effectively as its competitors, Towers Watson could lose market share. Towers Watson also could
lose market share if its competitors develop more cost-effective technologies than Towers Watson
will offer or develop.
Limited protection of Towers Watson intellectual property could harm Towers Watsons
business.
Towers Watson cannot guarantee that trade secret, trademark and copyright law protections will be
adequate to deter misappropriation of Towers Watsons intellectual property (including its
software, which may become an increasingly important part of Towers Watsons business). Existing
laws of some countries in which Towers Watson will provide services or products may offer only
limited protection of its intellectual property rights. Redressing infringements may consume
significant management time and financial resources. Also, Towers Watson may be unable to detect
the unauthorized use of its intellectual property and take the necessary steps to enforce Towers
Watsons rights, which may have a material adverse impact on the business, financial condition or
results of operations of Towers Watson.
Towers Watson could have liability or its reputation could be damaged if it does not
protect client data or information systems or if its information systems are breached.
Towers Watson will depend on information technology networks and systems to process, transmit
and store electronic information and to communicate among its locations around the world and with
its alliance partners and clients. Security breaches could lead to shutdowns or disruptions of
Towers Watsons systems and potential unauthorized disclosure of confidential information. Towers
Watson will also be required at times to
manage, utilize and store sensitive or confidential client or employee data. As a result,
Towers Watson will be subject to numerous U.S. and foreign jurisdiction laws and regulations
designed to protect this information, such as the European Union Directive on Data Protection and
various U.S. federal and state laws governing the protection of health or other individually
identifiable information. If any person, including any of Towers Watsons employees, fails to
comply with, disregards or intentionally breaches Towers Watsons established controls with respect
to such data or otherwise mismanages or misappropriates that data, Towers Watson could be subject
to monetary damages, fines or criminal prosecution. Unauthorized disclosure of sensitive or
confidential client or employee data, whether through systems failure, accident, employee
negligence, fraud or misappropriation, could damage Towers Watsons reputation and cause it to lose
clients. Similarly, unauthorized access to or through Towers Watsons information systems or those
it develops for its clients, whether by Towers Watsons employees or third parties, could result in
significant additional expenses (including expenses relating to notification of data security
breaches and costs of credit monitoring services), negative publicity, legal liability and damage
to Towers Watsons reputation, as well as require substantial resources and effort of management,
thereby diverting managements focus and resources from business operations.
Insurance may become more difficult or expensive to obtain.
The availability, terms and price of insurance (including, but not limited to, insurance for
errors and omissions, directors and officers, and employment practices) are subject to many
variables, including general insurance market conditions, loss experience in related industries and
in the actuarial and benefits consulting industry, and the specific claims experience of an
individual firm. Towers Watson will be subject to various regulatory requirements relating to
insurance as well as client requirements. There can be no assurance that Towers Watson will be able
to obtain insurance on terms comparable to those Towers Perrin or Watson Wyatt has obtained in the
past, at cost effective rates or with reasonable claim retentions. Increases in the cost of
insurance could affect Towers Watsons profitability and the unavailability of insurance to cover
certain risks could have a material adverse effect on Towers Watsons financial condition or Towers
Watsons ability to transact business in certain geographies, particularly in any specific period.
Towers Watson and its subsidiaries could encounter significant obstacles securing
primary insurance coverage for errors and omissions liability risks on favorable or
acceptable terms.
Towers Perrin and Watson Wyatt currently obtain primary insurance for errors and omissions
liability risks from a Vermont group captive insurance company known as Professional Consultants
Insurance Company (which we refer to as PCIC). The current shareholders and insureds of PCIC are
Towers Perrin, Watson Wyatt, and Milliman, Inc. While no decision has yet been made whether PCIC
will continue to be the primary insurer, in the event the shareholders of PCIC determine that it
should be placed into run-off mode (meaning PCIC continues to administer and pay existing claims,
but does not write new insurance policies), which determination can be made by the shareholders at
any time, Towers Watson will need to obtain primary insurance coverage in another manner, such as
through a single-parent captive insurance company, from one or more commercial insurance providers
or through a combination of these or other available alternatives. Alternatives to PCIC could
result in different coverage terms, higher premiums and/or higher loss retentions or deductibles,
than those Towers Perrin and Watson Wyatt have been able to obtain with PCIC as the primary issuer.
Alternative insurance arrangements also could result in increased earnings volatility for Towers
Watson. In addition, the unavailability at any future time of primary insurance coverage for errors
and omissions liability risk due to future loss experience, market conditions or other factors
could have a material adverse effect on Towers Watsons financial condition or Towers Watsons
ability to transact business in certain geographies, particularly in any specific period.
Both Towers Perrin and Watson Wyatt have material pension liabilities that will be
liabilities of Towers Watson following the merger, which liabilities can fluctuate
significantly with changes in interest rates.
Both Towers Perrin and Watson Wyatt have material pension liabilities, which will be assumed
by Towers Watson at the effective time. Watson Wyatts projected benefit obligation at June 30,
2009 was $1.1 billion, of which $255.4 million represented unfunded pension liabilities. Towers
Perrins projected benefit obligation at December 31, 2008 was $1.7 billion, of which, $455.8
million represented unfunded pension liabilities. Movements in the interest rate environment could
have a material effect on the level of liabilities in these plans at any given time. These pension
plans have minimum funding requirements that may require material amounts of periodic additional
funding. Cash required to fund pension plans may have to be diverted from other corporate
initiatives.
Towers Watson may not be able to obtain financing on favorable terms.
The maintenance and growth of Towers Watsons business will depend on its access to capital,
which will depend in large part on cash flow generated by its business and the availability of
equity and debt financing. There can be no assurance that Towers Watsons operations will generate
sufficient positive cash flow to finance all of Towers Watsons capital needs or that Towers Watson
will be able to obtain equity or debt financing on favorable terms or at all. Towers Watson expects
to enter into a credit agreement with one or more lenders, to close contemporaneously with the
mergers closing providing for a revolving credit facility of up to $500 million. As discussed
elsewhere in this document, during the first 12 months following the effective date, Towers Watson
will have significant cash requirements arising from the redemption of Towers Watson Class R common
stock and payment of principal and interest under the Towers Watson Notes, as well as one-time fees
and expenses relating to the merger. Towers Watson intends to fund such commitments by drawing down
on such facility, if necessary. There can be no assurance that Towers Watson will be able to enter
into a credit agreement on favorable terms or at all. Recent distress in the global credit markets
has adversely impacted the availability of credit. Towers Watsons ability to enter into a credit
agreement may be limited if market and general economic conditions continue to deteriorate or if
Towers Watson is unable to meet certain closing conditions including the absence of a material
adverse effect. If Towers Watson is unable to secure financing under a new credit agreement, it may
incur fees to lenders under existing credit agreements with Towers Perrin and Watson Wyatt to
obtain their consent to the merger.
Towers Watson intends to enter into a revolving credit facility, which will contain a
number of restrictive covenants that may restrict Towers Watsons operations.
Towers Perrin and Watson Wyatt have entered into a commitment letter (the Commitment Letter)
with Bank of America, N.A., PNC Bank, National Association and certain other parties with respect
to a revolving credit facility of up to $500 million to be made available to Towers Watson
following the closing of the merger (the Senior Credit Facility), as described at Towers Perrin
Proposal No. 1 and Watson Wyatt Proposal No. 1: The Merger Agreement Senior Credit Facility.
Towers Perrin and Watson Wyatt expect the Towers Watson credit agreement will contain a number
of customary restrictive covenants imposing operating and financial restrictions on Towers Watson
and certain of its subsidiaries, including restrictions that may limit their ability to engage in
acts that may be in Towers Watsons long-term best interests. These covenants are likely to
include, among others, limitations (and in some cases, prohibitions) that would, directly or
indirectly, restrict Towers Watsons ability to:
| Incur liens or additional indebtedness (including guarantees or contingent obligations); | ||
| Engage in mergers and other fundamental changes; | ||
| Sell or otherwise dispose of property or assets; | ||
| Pay dividends and other distributions; and | ||
| Change the nature of its business. |
The credit agreement also is expected to contain financial covenants that would limit Towers
Watsons interest expense and total debt relative to EBIDTA.
Any operating restrictions and financial covenants in Towers Watsons credit agreement and any
future financing agreements may limit Towers Watsons ability to finance future operations or
capital
needs or to engage in other business activities. Towers Watsons ability to comply with any
financial covenants could be materially affected by events beyond its control, and there can be no
assurance that it will satisfy any such requirements. If Towers Watson fails to comply with these
covenants, Towers Watson may need to seek waivers or amendments of such covenants, seek alternative
or additional sources of financing or reduce its expenditures. Towers Watson may be unable to
obtain such waivers, amendments or alternative or additional financing at all, or on terms
favorable to Towers Watson.
The credit agreement is expected to specify several events of default, including non-payment,
certain cross-defaults, certain bankruptcy events, covenant or representation breaches and certain
changes in control. If an event of default occurs, the lenders under the credit agreement are
expected to be able to elect to declare all outstanding borrowings, together with accrued interest
and other fees, to be immediately due and payable. Towers Watson may not be able to repay all
amounts due under the credit agreement in the event these amounts are declared due upon an event of
default.
Risks Relating to an Investment in Towers Watsons Securities
There has been no prior public market for Towers Watson Class A common stock.
Before this offering, no public market existed for the Towers Watson Class A common stock.
Towers Watson plans to apply to list the Towers Watson Class A common stock on the NYSE and on
NASDAQ. However, an active public market for the Towers Watson Class A common stock may not develop
or be sustained after the completion of the merger, which could affect the ability to sell, or
depress the market price of, the Towers Watson Class A common stock. Towers Watson cannot predict
the extent to which a trading market will develop or how liquid that market might become.
The market price of Towers Watson Class A common stock may decline if we do not achieve
the anticipated benefits of the merger.
The market price of Towers Watson Class A common stock may decline if, among other factors,
the integration of the Towers Perrin and Watson Wyatt businesses is unsuccessful, the operational
cost savings estimates are not realized or the transaction costs related to the merger are greater
than expected. The market price of Towers Watson Class A common stock also may decline if we do not
achieve the perceived benefits of the merger as rapidly as, or to the extent, anticipated by
financial or industry analysts or if the effect of the merger on Towers Watsons financial results
is not consistent with the expectations of financial or industry analysts.
The stock price of Towers Watson Class A common stock may be volatile.
The stock price of the Towers Watson Class A common stock may be volatile and subject to wide
fluctuations. In addition, the trading volume of the Towers Watson Class A common stock may
fluctuate and cause significant price variations to occur. Some of the factors that could cause
fluctuations in the stock price or trading volume of the Towers Watson Class A common stock
include:
| General market and economic conditions, including market conditions in the human capital and risk and financial management consulting industries; | ||
| Actual or expected variations in quarterly operating results; | ||
| Differences between actual operating results and those expected by investors and analysts; | ||
| Changes in recommendations by securities analysts; | ||
| Operations and stock performance of competitors; | ||
| Accounting charges, including charges relating to the impairment of goodwill; | ||
| Significant acquisitions or strategic alliances by Towers Watson or by competitors; | ||
| Sales of the Towers Watson Class A common stock, including sales by Towers Watsons directors and officers or significant investors; | ||
| Recruitment or departure of key personnel; | ||
| Loss of key clients; and | ||
| Changes in reserves for professional liability claims. |
We cannot assure you that the stock price of the Towers Watson Class A common stock will not
fluctuate or decline significantly in the future. In addition, the stock market in general can
experience considerable price and volume fluctuations that may be unrelated to Towers Watsons
performance.
Shares of Towers Watson common stock eligible for public sale after completion of the
merger could adversely affect the stock price.
Immediately at the effective time, Towers Perrin security holders will be entitled to receive,
in the aggregate, 50% of Towers Watsons voting common stock then outstanding. These shares will be
subject to various restrictions following the effective time as described more fully in this
document. See The Merger Agreement Vesting, Forfeiture, Transfer and Reallocation Provisions.
For example, shares of Towers Watson Class B common stock will automatically convert into freely
tradable Towers Watson Class A common stock in equal annual installments over four years from the
effective time. In addition, transfer restrictions on shares of
Towers Watson restricted Class A common stock to be received by a holder of Towers Perrin RSUs
will lapse over the course of a three-year vesting schedule (or such other vesting schedule as may
be set forth in the holders Towers Perrin RSU award agreement). For a hypothetical example showing
the timing and volume of shares that will become available for sale in the public market following
the merger, see Description of Towers Watsons Common Stock Capital Stock Lapsing of
Transfer Restrictions. The sales or potential sales of a substantial number of shares of Towers
Watson Class A common stock in the public market after the Towers Watson Class B common stock
converts or shares of Towers Watson restricted Class A common stock vest could depress the market
price of Towers Watson Class A common stock at such time and could then impair the ability of
Towers Watson to raise capital through the sale of additional securities.
Shares of Towers Watson common stock received by Towers Perrin security holders in the
merger are subject to, among other things, restrictions on transfer, which may prevent
their holders from realizing gains or minimizing losses during certain time periods.
As discussed elsewhere in this document, shares of Towers Watson common stock received by
Towers Perrin security holders in the merger may not be sold or transferred for a period of time,
except in limited circumstances, following the effective time. For a description of these transfer
and other restrictions, and the circumstances in which they lapse or are removed, see The Merger
Agreement Vesting, Forfeiture, Transfer and Reallocation Provisions.
During the duration of these restrictions, Towers Perrin security holders will be precluded
from realizing any gains or minimizing losses from the increase or decrease in the market price of
the shares of Towers Watson Class A common stock.
Towers Watson has not yet determined its dividend policy and may not pay dividends.
Towers Watson has not yet determined its dividend policy. Any determination to pay dividends
in the future will be at the discretion of the Towers Watson board of directors and will depend
upon Towers Watsons results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law, rule or regulation, business and investment strategy, and
other factors that the Towers Watson board of directors deems relevant. Although Watson Wyatt has
historically paid quarterly dividends to its stockholders, the Towers Watson board of directors may
determine not to pay periodic or other dividends to holders of Towers Watson common stock. If
Towers Watson does not pay dividends, then the return on an investment in its common stock will
depend entirely upon any future appreciation in its stock price. There is no guarantee that Towers
Watsons common stock will appreciate in value or maintain its value.
There will be no trading market for the Towers Watson Class B common stock or the Towers
Watson Notes.
None of the Towers Watson Class B common stock or Towers Watson Notes will be listed on any
securities exchange or included in any automated quotation system and no trading market for such
classes of common stock or the Towers Watson Notes is expected to develop. The transfer of the
Towers Watson Class B common stock will be restricted under Towers Watsons governing documents and
the transfer of the Towers Watson Notes will be restricted under the indenture governing the Towers
Watson Notes (we refer to this indenture, a form of which is attached to this document as Annex F,
as the Towers Watson Notes Indenture). As a result of these restrictions, holders of such
securities will not be able to dispose of such securities other than in the limited circumstances
described in The Merger Agreement Vesting, Forfeiture, Transfer and Reallocation Provisions.
The right to receive payment on the Towers Watson Notes will be subordinate to Towers
Watsons obligations to its senior creditors and will be effectively subordinated to the
existing and future debt and other liabilities of Towers Watsons subsidiaries to the
extent of the assets of such subsidiaries.
The Towers Watson Notes will rank junior to Towers Watsons obligations to its senior
creditors, which are expected to generally include all of its third-party creditors other than
trade creditors. All payments on the Towers Watson Notes will be blocked in the event of a payment
default to senior creditors or a default that entitles lenders to accelerate the maturity of such
debt. In addition, the terms of the Towers Watson Notes do not limit the amount of additional
indebtedness Towers Watson can create, incur, assume or guarantee in the future. In the event of a
distribution of Towers Watsons assets upon any insolvency, dissolution or reorganization, the
payment of principal and interest to its senior creditors will have priority over the payment of
principal and interest on the Towers Watson Notes. Towers Watson may not have sufficient assets
remaining to pay amounts due on of the Towers Watson Notes after it has paid principal and interest
to its senior creditors.
Further, the Towers Watson Notes will be effectively subordinated to the liabilities of Towers
Watsons subsidiaries, following the effective time, including Towers Perrin and Watson Wyatt. Any
right of Towers Watson to receive the assets of any of its subsidiaries upon a subsidiarys
insolvency, dissolution or reorganization, and the dependant right of holders of the Towers Watson
Notes to have rights in those assets, will be subject to the prior claim of any creditors of that
subsidiary.
Towers Watson may not have sufficient cash to pay the Towers Watson Notes.
Towers Watson will conduct substantially all of its business following the effective time through
operating subsidiaries, including Towers Perrin and Watson Wyatt. Accordingly, Towers Watsons
ability to repay the Towers Watson Notes will depend on the earnings of and distribution of funds
from Towers Perrin and Watson Wyatt. Each of these subsidiaries will be distinct legal entities
and, under certain circumstances, legal and contractual restrictions may limit Towers Watsons
ability to obtain cash from them. If Towers Watson does not have sufficient cash to repay the
Towers Watson Notes for any reason, it will be forced to take actions such as revising or delaying
strategic plans, reducing or delaying capital expenditures, selling assets, restructuring or
refinancing debt or seeking additional equity capital. Towers Watson may not be able to effect any
of these remedies on satisfactory terms, or at all.
The Towers Watson Notes will not require Towers Watson to achieve or maintain minimum
financial results, refrain from incurring additional debt or limit its ability to take
specified actions. The lack of any of these provisions could negatively impact holders
of the Towers Watson Notes.
The terms of the Towers Watson Notes Indenture will not require Towers Watson to achieve or
maintain any minimum financial results relating to its financial position or results of operations.
In addition, the Towers Watson Notes Indenture will not contain any operating covenants, restrict
Towers Watson from incurring additional debt that is senior to, or pari passu with, the rights of
the holders of the Towers Watson Notes to receive payment or restrict Towers Watson from paying
dividends, incurring liens or repurchasing any of its indebtedness or capital stock. Towers Watson
will not be required to redeem the Towers Watson Notes in the event Towers Watson undergoes a
change of control. Towers Watsons ability to take any of these actions could diminish its ability
to repay the Towers Watson Notes when due.
If Towers Watson is not able to implement any recommended improvements in its internal
control over financial reporting or favorably assess the effectiveness of its internal
control over financial reporting, or if its independent registered public accounting
firm is not able to provide an unqualified attestation report on the effectiveness of
Towers Watsons internal control over financial reporting, the stock price for Towers
Watson Class A common stock could be materially adversely affected.
If Towers Watsons internal control over financial reporting is not effective, the reliability
of Towers Watsons financial statements could be impaired. After the merger, Towers Watson expects
to devote considerable resources, including managements time and other internal resources, to a
continuing effort to comply with regulatory requirements relating to internal control and the
preparation of financial statements, including implementing any changes recommended by Towers
Watsons independent
registered public accounting firm. In particular, these efforts will focus on
Towers Perrin and its subsidiaries, which have not previously been subject to the requirements of
Section 404 or 302 of the Sarbanes-Oxley Act of 2002, as amended, and the rules promulgated
thereunder by the SEC. Towers Watson will be required to certify to and report on, and its
independent registered public accounting firm will be required to attest to, the effectiveness of
Towers Watsons internal control over financial reporting on an annual basis after completion of
the merger. If Towers Watson cannot favorably assess the effectiveness of its internal control over
financial reporting, or if Towers Watsons independent registered public accounting firm is unable
to provide an unqualified attestation report on the effectiveness of Towers Watsons internal
control over financial reporting, investor confidence and, in turn, the market price of the Towers
Watson Class A common stock could be materially adversely affected.
During preparation of Towers Perrins financial statements for the year ended December 31,
2008, Towers Perrin identified a material weakness relating to the financial system applications
used for accounting and accounts receivable and the processes surrounding the use of these systems.
Specifically, Towers Perrin concluded that the financial system applications used for accounting
and accounts receivable and the processes surrounding the use of these systems did not include
adequately designed internal controls to ensure the appropriate foreign currency translation and
remeasurement of accounts receivable. During the first quarter of 2009, Towers Perrins management
implemented new controls to address this material weakness. As of the date of this document, Towers
Perrins management has not conducted testing of the operating effectiveness of those new controls
and procedures.
There can be no assurance that Towers Watson will be able to implement and maintain any
recommended improvements in Towers Watsons controls over its financial reporting. Any failure to
do so could cause the reliability of Towers Watsons financial statements to be impaired and could
also cause Towers Watson to fail to meet its reporting obligations under applicable law, either of
which could cause investor confidence and, in turn, the market price of the Towers Watson Class A
common stock, to be materially adversely affected.
Towers Watson will have various mechanisms in place that could prevent a change in
control that a stockholder might favor.
Towers Watsons certificate of incorporation and bylaws will contain provisions that might
discourage, delay or prevent a change in control that a stockholder might favor. Towers Watsons
certificate of incorporation or bylaws will:
| Authorize the issuance of preferred stock without fixed characteristics, which could be issued by Towers Watsons board of directors pursuant to a shareholder rights plan and deter a takeover attempt; | ||
| Provide that only the Chief Executive Officer, President or board of directors may call a special meeting of stockholders; | ||
| Limit business at special stockholder meetings to such business as is brought before the meeting by or at the direction of Towers Watsons board of directors; | ||
| Prohibit stockholder action by written consent, and require all stockholder actions to be taken at an annual or special meeting of the stockholders; | ||
| Provide Towers Watsons board of directors with exclusive power to change the number of directors; | ||
| Provide that all vacancies on Towers Watsons board of directors, including new directorships, may only be filled by a resolution adopted by a majority of the directors then in office; | ||
| Not opt out of Section 203 of the Delaware General Corporation Law, which prohibits business combinations between a corporation and any interested stockholder for a period of three years following the time that such stockholder became an interested stockholder; | ||
| Require a super-majority vote for the stockholders to amend Towers Watsons bylaws; and | ||
| Prohibit any stockholder from presenting a proposal or director nomination at an annual stockholders meeting unless such stockholder provides Towers Watson with sufficient advance notice. |