Analysts Bullish On Towers Watson Following Liazon Acquisition

Towers Watson & Co. (TW) is down slightly today, but analysts are optimistic that the stock can climb higher, given its acquisition of privately held Liazon Corporation for $125 million.

Liazon develops private benefit exchanges and online benefit markets for employees, an area where human resources and benefit solutions provider Towers Watson has already built a name for itself.

Analysts are looking at the acquisition favorably, even if the market is skeptical today. Deutsche Bank analysts Paul Ginocchio and Ato Garrett today reiterated their Buy rating on Towers Watson and raised their target price by $5 to $130.

From the note:

TW has gotten more bullish on the adoption rate of exchanges: The adoption rate of exchanges is happening faster than TW expected just 6 months ago. TW agrees with forecasts of 35-70m covered lives (employees + dependents) on an exchange in 5-yrs. TW expects middle market companies to potentially adopt faster than large market companies, thus it has acquired Liazon to meet that need now. OneExchange Active will continue to focus on the large market (>10,000 employees) while Liazon focuses on the mid-market (1,000 to 10,000) via its insurance brokerage sales network.

Liazon should help TW close the gap in the active exchanges: On 1/1/14, TW will have about 140,000 lives on its two active exchange platforms (40,000 on OneExchange Active and 100,000 on Liazon) and is targeting up to 1m lives for 1/1/15. AON has stated it will have over 600,000 covered lives on its exchange on 1/1/14, Bucks (Xerox) will have 400,000 and Mercer 165,000. The Liazon acquisition moves TW's size much closer to Mercer and puts TW in a position to capture 25-33% market share longer-term.

MKM Partners is also bullish about Towers' prospects. Analysts Darren Marcus and Harry Fong reiterated a Buy rating and $140 price target on the stock writing: "While Towers had an existing presence in the active employee exchange market, its offering catered predominantly to larger companies with over 10,000 employees. The Liazon acquisition complements Towers' existing platforms as it gives Towers access to smaller and mid-sized companies. With Liazon, Towers' can service virtually every market segment with a self and fully insured exchange product. Towers Watson clearly believes in the potential for private exchanges and is willing to invest to ensure it has a major presence in this space in the years to come."