WATSON WYATT MEMO
WORLDWIDE
October 16, 1996
To: All Shareholders
From: Pete Smith
Subject: 1996 Proxy Statement
The Proxy Statement you have just received requests that you approve an
amendment to our Bylaws which would modify the formula for determining our stock
price. As you may already have discovered, this proposal does not change our
current book value stock valuation approach. But it does call for three narrow
modifications which will make our stock price more closely track our actual
operating results. Since the proxy language may be a little difficult to
understand, I want to clearly describe the importance of these changes to
shareholders.
Real Estate "Sublease Losses"
With almost 60 offices, Watson Wyatt & Company evaluates new office space
alternatives regularly. In the early 1990's, the Company moved into several
facilities during a period when market rents were at all time highs. We have now
identified opportunities where we can acquire more economical office space which
will add very substantial savings to our bottom line. For example, we presently
intend to relocate our Washington, D.C. headquarters operations1 to a suburban
Maryland location which will result in net savings to the company of
approximately $6.7 million over five years, despite realizing a loss on the
sublease of our existing downtown space.
Our share price is computed on the basis of generally accepted accounting
principals ("GAAP"), which require that any sublease loss on space we vacate be
recorded immediately (even though the move may produce a substantial economic
savings over a period of several years). Therefore, a move such as the one we
are contemplating in Washington can create a significant, immediate, negative
impact on the share price. For example, if the new formula is not adopted, and
the Company proceeds with the planned move of our Washington headquarters to the
Maryland suburbs, the share price for fiscal 1997 would be reduced by roughly
28-30 cents per share2. Under the proposal, the sublease loss will be spread
over five years during which time we will also be deriving the benefit of our
reduced rent. We believe the computation of the share price should encourage,
not discourage, prudent and economically sound business decisions such as
reductions in our rents.
Currency Translation Adjustment
Currency adjustments will always be an issue for a global company whose stock is
denominated is U.S. dollars. However, the GAAP requirement that changes be made
quarterly to the carrying value of foreign assets on the balance sheet solely
because of currency fluctuations causes constant variations in our share price
that do not reflect the overall annual results of our operations. We believe it
is more appropriate to recognize these fluctuations (for purposes of our share
price) only if these assets are disposed of, thus reducing short-term
fluctuations (up or down) which are unrelated to operating results.
Surveys
When the Company bought ECS (now Wyatt Data Services) in 1984, the Bylaws were
changed to include a unique adjustment to the share formula related to the
revenues of that non-consulting business. We believe it is now appropriate to
reflect the operations of this business in our share value in the same way as
the other operations of the Company.
Summary
Our management team and the Board strongly believe that these changes to the
share valuation formula will more closely correlate the share price to actual
operating results. These changes are consistent with many other changes we have
made over the past three years to assure that our focus is on operations and
profitability. I urge each of you to vote in favor of the proposed amendment.
Since 80% of all shareholders must approve the amendment, each shareholder's
vote is very important.
If you have questions regarding these issues, you can contact Barbara Landes in
F&A or Wally Bardenwerper in the General Counsel's Office.
Please see the 1996 Proxy Statement for a more complete discussion of these
issues
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1 Where the Office of the President, F&A, Legal, Marketing, RIC and HR are
located.
2 If this new formula is not adopted and the Company decides to proceed with
only a portion of the transaction, the loss per share will still be roughly
10-15 cents per share.
