Watson isn't the perfect back-up point guard, given that he's not much of a distributor, but he's an efficient player offensively and he doesn't turn the basketball over a lot. Given his skill-set, it's clear that Watson would be an ideal fit with the Magic. But it remains whether or not Otis Smith will be able to sign him.
Too early to make an opinion like that one way or the other.
Watson isn't a major upgrade ... he would fill the need at back-up point guard, but that's it. Watson isn't an underrated defender, either. Defense is something Watson will need to work on if he's snatched away from the Warriors. To say that he's a much better scorer and defender than Nelson is inflating Watson's value. Nelson is an All-Star caliber point guard when he's at his best. Watson is not.
Signing McGrady would be a mistake, by the way, given that he doesn't bring much to the table anymore with his declining skills and athleticism. But Smith wouldn't waste his time, so it's a moot point.