Aon Drops After $4.9 Billion Agreement to Buy Hewitt
Aon Corp. CEO Greg Case. Photographer: Charles Pertwee/Bloomberg
Aon Corp., the world’s largest insurance broker, led decliners in the Standard & Poor’s 500 after agreeing to buy Hewitt Associates Inc. for $4.9 billion.
Aon fell $2.72, or 7.1 percent, to $35.62 at 4:15 p.m. in New York Stock Exchange composite trading, the biggest drop in more than a year. The cash-and-stock deal values Hewitt at $50 a share, or 41 percent more than the consulting firm’s closing price on July 9, Chicago-based Aon said in a statement today. Hewitt soared 32 percent, or $11.39, to $46.79.
“In the short term it’s a negative,” said Meyer Shields, an analyst with Stifel Nicolaus & Co., who has a “buy” rating on Aon’s stock. “Integrations are always messy, and Aon is using an undervalued stock to pay for it.”
Chief Executive Officer Greg Case, 47, is more than doubling the size of Aon’s consulting business as Marsh & McLennan Cos., the second-biggest insurance broker, is scaling back its advisory activity. Consulting firms are under pressure to grow after benefits-consulting company Towers Watson & Co. was formed this year in a $3.5 billion merger.
Aon will pay $25.61 in cash and 0.6362 of a share for each Hewitt share. Aon’s share slide was the most since it fell 14 percent on May 1, 2009.
The purchase is Aon’s biggest, surpassing its $1.4 billion acquisition of reinsurance broker Benfield Group Ltd. in 2008, according to data compiled by Bloomberg. The company, which earns commissions by matching buyers and sellers of insurance, is seeking to boost revenue with the purchase of Hewitt, which provides payroll and consulting services to 3,000 clients.
‘Stick to Insurance’
“Aon’s acquisition significantly expands its consulting revenue base at a time when we think it should be decreased,” Rob Haines, an analyst with CreditSights Inc., said today in a research note. “Insurance companies should stick to insurance.”
Aon may be downgraded by Moody’s Investors Service on the deal, the ratings firm said in a statement. Moody’s changed the outlook on Aon’s Baa2 debt rating to negative from stable.
“This is about growth and building our firm,” Case said on a conference call. In consulting, “we really weren’t exactly where we thought we might be able to be, which is why we started to think who would be the best partner in that space.”
Aon will merge Lincolnshire, Illinois-based Hewitt with its Aon Consulting unit and rename the division Aon Hewitt. The company said it expects to reap $355 million in annual savings by cutting back-office costs and overlapping managers. Russ Fradin, chairman and CEO of Hewitt, will head the division and report to Case, who was a consultant with McKinsey & Co. before replacing Patrick Ryan as Aon’s CEO in 2005.
Job Cuts
“The way that consulting is run is often different from other businesses, and you have to have senior management that understands that,” said Peter Bendor-Samuel, CEO of Everest Group, a Dallas-based consulting firm that advises companies on outsourcing strategies. “It influenced Case and also gives some comfort to investors.”
Aon will cut jobs for “redundancies” following the transaction, Case said.
Consulting revenue at Aon fell about 7 percent last year to $1.3 billion. New York-based Marsh & McLennan’s consulting division, which includes the units Mercer and Oliver Wyman, posted about $4.6 billion in revenue last year, down 11 percent from 2008.
More Consulting
The acquisition is going make Aon more of a consulting operation, said Paul Newsome, an analyst with Sandler O’Neill & Partners LP in Chicago. “There’s going to be some scale benefits. The other thing they get is better recognition. I think from a pure consulting perspective, Hewitt is a better name than Aon.”
Marsh & McLennan agreed to sell its Kroll security- consulting business for $1.13 billion in June. The firm, led by CEO Brian Duperreault, is expanding its flagship insurance brokerage business by acquiring smaller middlemen.
Aon said it’s paying about 7.5 times Hewitt’s forecast earnings before interest, taxes, depreciation and amortization for the 2010 fiscal year. Credit Suisse Group AG and Morgan Stanley will arrange a $1 billion three-year term loan and a $1.5 billion bridge loan.
“The proposed funding structure would more than double Aon’s debt burden and reduce its financial flexibility,” Bruce Ballentine, a Moody’s analyst, said in the ratings firm’s statement.
Credit Suisse acted as a financial adviser to Aon and Citigroup Inc. advised Hewitt on the deal. Aon said it expects to complete the purchase by mid-November.
To contact the reporters on this story: Andrew Frye in New York at afrye@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net.
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