Wednesday, July 14, 2010

Hewitt/Aon Merger: Will a Rival Bid Swoop In?

Chicago-based Aon announced on Monday plans to acquire Hewitt for .6362 Aon shares and $ 25.61 in cash per Hewitt share, or about $ 4.9 Billion. Hewitt is “highly confident” about Aon’s financing.

Aon will likely wait until after securing shareholder approval to issue notes to fund the acquisition of Hewitt Associates, according to our sources.  The companies do not have a specific target date for the shareholder votes, but they could take place by late October or early November with the notes issued soon afterwards. The firms do not expect antitrust problems in either the US or Europe.

The cash portion of the transaction will be funded with a $1 Billion term loan and $1.5 Billion in notes, backstopped by a $ 1.5 Billion bridge facility from Credit Suisse and Morgan Stanley. Aon will likely issue a combination of five and ten year notes. This source reiterated comments by Aon’s CFO on Monday that Aon has no plans to draw down on the bridge facility.

The deal came together after Aon and Hewitt held internal discussions on the directions of their businesses. Aon debated growing its insurance brokerage business, but concluded it was more important to more evenly balance revenue between the brokerage and consulting businesses.

Once the deal closes, about 60% of Aon’s revenue will come from its brokerage and 40% from human resources outsourcing and consulting, compared to 80% and 20% prior to the deal. Aon will now more closely mimic the revenue mix of its rival, Marsh & McLennan.

Management is headed to the southeastern US today to meet with leading investors to brief them on Aon’s new direction, the first source said. We expect institutional shareholders to back the expansion of Aon’s consulting business.

On Hewitt’s side, over the years the company explored the idea of making acquisitions, including buying Aon’s consulting business or moving into the insurance brokerage business. Hewitt may have also talked about selling at times.

However, Hewitt’s CEO, Russell Fradin, told investors on Monday that the company was not for sale when Aon approached with an offer. Hewitt did not run a sale process in response to the inquiry, Aon’s CEO, Greg Case, told investors on the same call. Likewise, Aon did not make overtures to other human resources consultants, the first source added.

Potential rival bidders include Accenture, IBM and Marsh & McLennan, although a hostile offer is highly unlikely. Until the end of August, Hewitt only has to pay a $ 85M termination fee if the company receives a superior offer to Aon’s.

Marsh & McLennan likely would have moved to acquire Hewitt in the past if it was interested in buying the business to expand its Mercer human resources unit. Several firms have looked at Hewitt over the years.

Now that Hewitt’s management team and board have committed to selling, a rival bidder may be hesitant to swoop in because a hostile offer could push Hewitt’s primary assets – its consultants – to leave the firm. Aon and Hewitt’s chief executives are longtime friends and the firms held extensive talks on how to merge.

We expect more deals at accelerated speed. Our most attractive target remains Hay Group.

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