Looking to become more of a powerhouse in the global consultingbusiness while bolstering cross-selling opportunities, Aon Corp.announced last week it will acquire human resource and outsourcingfirm Hewitt Associates Inc. for approximately $4.9 billion in stockand cash.

The Chicago-based insurance broker said it will pay $50 a sharefor Lincolnshire, Ill.-based Hewitt, representing a 41 percentpremium to the company's closing stock price as of July 9. Aon saidthe deal would consist of a 50-50 split in cash and Aon stock.

Aon said it intends to integrate Hewitt with its existingconsulting and outsourcing operations and operate the company underthe name Aon Hewitt. The deal is expected to close by mid-November,pending regulatory and stockholder approval.

Russ Fradin, chair and chief executive officer of Hewitt, willbe named to the same posts of the new subsidiary.

“As we continue to grow our business, this merger will give us abroader portfolio of innovative products and services focused onwhat we believe are two of the most important topics in the globaleconomy today–risk and people,” said Aon CEO Greg Case, in astatement.

Mr. Fradin said the deal would give his clients more servicesand provide greater opportunities for the firm's associates.

Aon said it will pay $2.45 billion in cash and the rest instock. It has established loan commitments from Credit Suisse andMorgan Stanley for a three-year, $1 billion bank term loan, and a$1.5 billion loan facility, but expects to issue notes beforedrawing on the bridge loan.

The merged companies are expected to generate $4.3 billion inrevenue and consist of 29,000 associates globally. Revenues willconsist of 49 percent consulting services, 40 percent benefitoutsourcing and 11 percent from human resources.

The combination of large corporate and middle-market clients isexpected to provide significant cross-selling opportunities, Aonsaid, with Hewitt bringing in a large corporate client basecomplemented by Aon's middle-market accounts.

A reduction in back-office areas, public company costs,management overlap and leverage of technology platforms is expectedto generate approximately $355 million in savings annually. Aonsaid it expects the deal to be accretive to earnings by 2012.

In separate filings with the Securities and Exchange Commission,Aon said the deal would make it a $10.7 billion business with59,000 colleagues working in 120 countries, establishing a leadingposition for Aon in risk solutions, reinsurance and human capitalsolutions.

As for the future of employees with the companies, Aon said itcould offer no answers until after the deal is complete.

“It is inevitable that there will be some job losses, but wewill handle these situations with fairness and respect for thoseassociates,” the company said in one filing.

According to another filing, if Hewitt terminates the agreementunder “certain specified circumstances,” Hewitt must pay Aon atermination fee of $85 million or $190 million, depending on thereason. If Aon terminates the agreement, the broker will pay a feeof $190 million. However, if the agreement is terminated becauseAon could not obtain the required financing, the termination feewill be $225 million.

RATING REACTION

Moody's Investors Service affirmed Aon's debt rating after themerger deal was announced, but changed their rating outlook from“stable” to “negative.” Moody's said the change was made overconcerns about the move and the execution risks of such atransaction.

However, both Standard & Poor's Rating Services and FitchRatings affirmed their ratings of Aon Corp., and said the outlookremains “stable.”

“We believe the Hewitt acquisition will further bolster Aon'salready strong global posture in the consulting area,” said NeilStein, creditor analyst for S&P, in a statement. “In addition,we believe it will broaden and complement its overall business riskand earnings profile and create long-term operational synergies forthe enterprise.”

However, S&P said while it views Aon's “strategicinitiatives favorably,” there is still risk and uncertainty aboutthe integration, client and producer retention, challengesovercoming cultural differences, and client reaction to mixingAon/Hewitt teams.

“We believe that Aon must carefully balance what could be anoverwhelming pace of change to avoid unanticipated side effects,”S&P said.

Fitch said it “believes in the long term, Aon's acquisition ofHewitt will result in positive business and operation synergies,with reasonable integration risk.”

Hewitt is a world leader in human resources consulting andoutsourcing, and the transaction “will significantly increase Aon'smarket share in this area,” Fitch said.

The rating service went on to say it believes the Aon managementteam “has a very good track record related to the execution ofstrategic plans and expense cutting,” and for that reason thebroker can manage the integration risk.

In an analyst's note from Deutsche Bank, the firm said it seeslimited chance for competing bids for Hewitt, with the most likelypotential bidders being IBM, ADP and Accenture. It also expects noantitrust regulatory issues.