With Hewitt, Aon Will Jump Over Marsh to Be Largest HR Consultant

By and Amulya Nagaraj | July 13, 2010

Aon Corp. will spend $4.9 billion to buy Hewitt Associates Inc., in an aggressive bid to leapfrog archrival Marsh and McLennan and create the world’s largest human resource services company.

Aon, in its largest-ever deal, would issue 64 million shares and pay a 41 percent premium for Hewitt. The deal did not sit well with shareholders who knocked Aon’s stock price down 7.4 percent to $35.51 on the New York Stock Exchange.

“They are using a significantly undervalued stock to pay for it,” Stifel, Nicolaus & Co. analyst Meyer Shields said. “It is going to be fairly tough for Aon to cross-sell its products into Hewitt’s customer base.”

Aon Chief Executive Greg Case, who had been eyeing Hewitt for a while, approached Russ Fradin, his counterpart at the HR firm, in early June with an informal offer, starting one-on-one talks that led to the agreement, sources close to the deal said.

Aon, the world’s largest insurance brokerage, announced on Monday a $50 per share offer for Hewitt, consisting of $25.61 in cash and 0.6362 in Aon stock.

The deal comes amid a trend toward consolidation in HR services in the last few years as firms look to cut costs amid tough economic times, search for efficiencies and scale and eye global markets, especially in emerging countries.

Marsh’s Mercer consulting business had revenue of $3.3 billion in 2009. Marsh shares were off 2.3 percent to $22.59 on the NYSE.

It surpasses the $4 billion Towers Perrin and Watson Wyatt merger, which created the world’s largest HR consultants when it closed in January 2010.

Aon bought Benfield, a London-based reinsurance broker, in 2008, and was looking to grow its consulting business. Aon’s consulting business had 2009 revenue of about $1.2 billion. With the Hewitt purchase, its revenue would grow to $4.3 billion.

Its bid is a preemptive move, as it believed others might have been interested in Hewitt as well, said the sources, who requested anonymity because they were not authorized to speak publicly about the deal.

“If he really wanted to become the biggest and the best in HR services, Hewitt was the last and only deal to make that happen,” one of the sources said, referring to Case.

Hewitt provides services such as creating and managing retirement programs, designing and delivering health programs, reducing HR costs and attracting and rewarding talent.

The two businesses do not overlap much, with Aon tending to focus on middle-market companies while Hewitt focuses large companies, the second source said.

Aon expects the deal to add to 2011 and 2012 earnings and generate about $355 million in annual cost savings in 2013, primarily from reduction in back-office areas.

An added attraction for Aon was the Hewitt brand and the chance to bring its consulting business under it, the source said.

Aon plans to integrate Hewitt with its existing consulting and outsourcing operation. The combined unit would be named Aon Hewitt and headed by Fradin, who would report to Case.

RICH PREMIUM

The offer is 41 percent more than Hewitt’s closing stock price on Friday, and 14 percent more than Hewitt’s all-time high, reached in December.

Hewitt shares were up 32 percent to $46.73 on the NYSE.

Morningstar analyst Bill Bergman said he was concerned about the premium, which he said implied a fair value loss for Aon’s shareholders of $3 per share.

The price is at a multiple of about 7.5 times Hewitt’s fiscal year 2010 consensus estimates earnings before interest, taxes, depreciation and amortization (EBITDA).

The multiple is a “higher multiple than Hewitt’s shares have seen in quite some time,” said Timothy McHugh, an analyst at William Blair & Co.

But taking the synergies into account, the multiple is closer to 5 times EBITDA, McHugh said, adding that at that level the “price isn’t exceptionally high.”

The insurance brokerage has financing commitments from Credit Suisse and Morgan Stanley for a three-year $1 billion bank term loan and a $1.5 billion bridge loan facility.

The deal is expected to close by mid-November.

Credit Suisse acted as financial adviser to Aon, and Sidley Austin LLP is serving as legal counsel. Citigroup Global Markets served as exclusive financial advisor to Hewitt, and Debevoise & Plimpton LLP and Paul, Weiss, Rifkind, Wharton & Garrison LLP are serving as legal counsel.

(Reporting by Paritosh Bansal in New York and Amulya Nagaraj and Abhinav Sharma in Bangalore; Editing by Saumyadeb Chakrabarty and Robert MacMillan)

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