Aon Corp, the world’s largest insurance brokerage, said Monday it will buy Hewitt Associates Inc for $4.9 billion in cash and stock to create the world’s largest human resources company.
With Hewitt, Aon will get a firm foothold in human resource and benefits outsourcing and take on rival insurance broker Marsh and McLennan’s Mercer unit. The deal, the second major transaction in the consultancy space in a year, surpasses the $4 billion merger of Towers Perrin and Watson Wyatt, which created the world’s largest HR consultants when it closed in January 2010.
Aon shares fell 7 percent to $35.57 in morning trading on the New York Stock Exchange. Stifel, Nicolaus & Co analyst Meyer Shields said Aon’s shares were undervalued relative to peers, so using stock to buy Hewitt was a negative.
“Deals of this size almost always invoke significant distractions for management,” Shields added in a research note. Aon’s offer of $50 a share — $25.61 in cash and 0.6362 in Aon stock — is 41 percent above Hewitt’s closing stock price on Friday. Hewitt shares were up 33.6 percent to $47.30 in morning trading on the New York Stock Exchange.
Aon plans to integrate Hewitt with its existing consulting and outsourcing operations and sees annual revenue of $4.3 billion. The combined unit will be named Aon Hewitt and will be headed by Russ Fradin, chairman and chief executive officer of Hewitt. Fradin will report to Greg Case, chief executive of Aon. Aon expects the deal to add to 2011 and 2012 earnings and generate $355 million in annual cost savings in 2013, primarily from reduction in back-office areas.
The purchase price reflects a multiple of about 7.5 times Hewitt’s fiscal 2010 consensus estimate for earnings before interest, taxes, depreciation and amortization. The deal is expected to close by mid-November. Aon 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.
Credit Suisse acted as financial adviser to Aon, and Sidley Austin LLP is serving as legal counsel. Citigroup Global Markets served as exclusive financial adviser to Hewitt, and Debevoise & Plimpton LLP and Paul, Weiss, Rifkind, Wharton & Garrison LLP are serving as legal counsel.
New York, July 12, 2010 (Reuters)