EUROPE - Watson Wyatt Worldwide says it will be limited in the way it operates its new European subsidiary until the middle of next year.

The consulting firm took over its affiliate Watson Wyatt LLP last year in a $451m deal, which contained certain covenants.

"Our discretion to operate the European business is restricted at least until mid-2007, which may adversely affect our ability to maximize the performance and results of operations of the European business," the firm said in its latest 10-K filing with the Securities and Exchange Commission last week.

The company did not mention this in its previous 10-K filing a year ago.

"During this period, we generally must operate the European business in the ordinary course in the same manner as operated before consummation of the acquisition," the firm said in the filing. 

Additional restrictions "include prohibitions on material changes to the terms or conditions of any category of employment if such changes would have a material adverse effect on fiscal year 2007 staff costs of the European business".

And it's required to appoint a management team that is required to be incentivized to deliver superior financial performance and shareholder return and increased revenues.

It said: "Such requirements and prohibitions will limit our discretion in operating the European business until mid-2007, and may adversely affect our ability to maximize the performance of the European business or to achieve all of the potential benefits of the acquisition."

Last month Watson Wyatt Worldwide reported "robust demand" for investment strategy and fund manager selection services amid an 18% increase in revenues at its investment consulting group.