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

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

Aon said it intends to integrate Hewitt with its existing consulting and outsourcing operations and operate the company under the 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, will be named to the same posts of the new subsidiary.

“As we continue to grow our business, this merger will give us a broader portfolio of innovative products and services focused on what we believe are two of the most important topics in the global economy today–risk and people,” said Aon CEO Greg Case, in a statement.

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

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

The merged companies are expected to generate $4.3 billion in revenue and consist of 29,000 associates globally. Revenues will consist of 49 percent consulting services, 40 percent benefit outsourcing and 11 percent from human resources.

The combination of large corporate and middle-market clients is expected to provide significant cross-selling opportunities, Aon said, with Hewitt bringing in a large corporate client base complemented by Aon's middle-market accounts.

A reduction in back-office areas, public company costs, management overlap and leverage of technology platforms is expected to generate approximately $355 million in savings annually. Aon said 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 with 59,000 colleagues working in 120 countries, establishing a leading position for Aon in risk solutions, reinsurance and human capital solutions.

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

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

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

RATING REACTION

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

However, both Standard & Poor's Rating Services and Fitch Ratings affirmed their ratings of Aon Corp., and said the outlook remains “stable.”

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

However, S&P said while it views Aon's “strategic initiatives favorably,” there is still risk and uncertainty about the integration, client and producer retention, challenges overcoming cultural differences, and client reaction to mixing Aon/Hewitt teams.

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

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

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

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

In an analyst's note from Deutsche Bank, the firm said it sees limited chance for competing bids for Hewitt, with the most likely potential bidders being IBM, ADP and Accenture. It also expects no antitrust regulatory issues.

Special Reports /

Aon To Buy Hewitt Associates For $4.9 Billion

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