3. Willis Towers Watson Public Limited Company (NASDAQ:WTW)
Number of Hedge Fund Holders: 66
PE Ratio: 6.81
Willis Towers Watson Public Limited Company (NASDAQ:WTW) is a London-based insurance broker. Top hedge funds hold large stakes in the company. Among the hedge funds being tracked by Insider Monkey, New York-based investment firm First Eagle Investment Management is a leading shareholder in Willis Towers Watson Public Limited Company (NASDAQ:WTW), with 4.7 million shares worth more than $1.1 billion.
Regulatory filings show that Baupost Group owned more than 1.2 million shares of Willis Towers Watson Public Limited Company (NASDAQ:WTW) at the end of December 2021 worth $296 million, representing 2.93% of the portfolio.
In its Q3 2021 investor letter, Alluvial Capital Management, an asset management firm, highlighted a few stocks and Willis Towers Watson Public Limited Company (NASDAQ:WTW) was one of them. Here is what the fund said:
“The second position is much larger and was thrown into our hands by an unexpected turn of events. It is the stock of Willis Towers Watson Public Limited Company (NASDAQ:WTW). This is a British company with roots dating back to 1828. WLTW is the third-largest insurance broker in the world. This is a sector with which we are very familiar, as some time ago we held in our portfolio shares of its slightly larger competitor AON.
It was AON in fact that announced last spring it had agreed to merge with WLTW. In the merger, Willis Towers Watson Public Limited Company (NASDAQ:WTW) shareholders would have received AON shares. As is usually the case with such announcements, investors stepped in to conduct what is known as merger arbitrage. In this particular case, they bought Willis Towers Watson Public Limited Company (NASDAQ:WTW) shares and sold short AON shares in order to profit from the fact that the prices of the two stocks did not yet fully reflect the exchange ratio in the merger. Moreover, merger arbitrage commonly makes extensive use of leverage in order to increase profits.
This summer, however, AON and WLTW jointly announced that they were pulling out of the planned merger because they had not received approval from the US Department of Justice. The regulator had feared that in an already quite concentrated industry, a merger of the second- and third-largest players would restrict competition too much. The immediate reaction to this announcement was, of course, closing of positions from the merger arbitrage. This brought an immediate increase in the price of AON shares and decline in the price of WLTW shares. We saw this as an excellent buying opportunity in Willis Towers Watson Public Limited Company (NASDAQ:WLTW) stock. (In addition, WLTW had received a USD 1 billion breakup fee from AON.) Because we knew the industry and the two companies well from earlier years, we were able to react immediately, and a new, very attractive investment appeared in Vltava Fund’s portfolio rather unexpectedly and quickly.
Insurance brokerage is a very good business. Simply put, insurance brokers are intermediaries who sell, find, or negotiate insurance on behalf of a client for a fee. They do not bear the insurance risk themselves and thereby do not risk their own capital. They live from commissions and the fact that this is a large and recurring business. Just to give you a sense of this, I will note, for example, that of the 500 companies in the Fortune Global 500 list, more than 90% are clients of WLTW. The entire industry is very concentrated and has relatively high barriers to entry. Willis Towers Watson Public Limited Company (NASDAQ:WTW) is the third-largest global player, has very high free cash flow, low capital investment requirements, and a very valuable client base. The business as a whole also provides some long-term inflation protection, as the speed at which the volume of total premiums grows follows the speed at which the economy and asset prices grow in nominal terms. I have to say we are very happy that circumstances have passed this investment on to us.”
