Updated with correction
Aon Corp. agreed to buy Hewitt Associates Inc. for $4.9 billion in a combination of cash and stock to expand its retirement investment and benefit consulting division, according to a statement Monday from the two companies.
In the deal, Hewitt shareholders will receive $25.61 in cash and 0.6362 of an Aon share in newly issued Aon stock, valuing the total offer at $50 a share and a 41% premium over Hewitt's closing price on July 9.
Hewitt shareholders will wind up owning 19% of Aon, said David Prosperi, Aon spokesman.
Aon plans to merge Hewitt into its Aon Consulting unit, renaming the division Aon Hewitt. Russell P. Fradin, Hewitt chairman and CEO, was named chairman and CEO of Aon Hewitt, reporting to Gregory C. Case, president, CEO and director of Aon.
It is premature to determine the roles of Baljit Dail and Kathryn Hayley, co-CEOs of Aon Consulting, Mr. Prosperi said, noting Mr. Dail is also chief operating officer of the Aon Benfield reinsurance brokerage unit and Ms. Hayley is one of the leaders of the Aon Hewitt integration team.
Hewitt's business includes retirement plan investment, actuarial and other benefit and human resource services. Its Hewitt Investment Group unit, which oversees the retirement consulting, has $76.8 billion under non-discretionary management and $260.3 million under discretionary management, in which it assumes co-fiduciary responsibility in money management it delegates to other investment advisory firms.
Of Hewitt's $3 billion in revenue, 33% comes from consulting services, 51% from benefit outsourcing and 16% from human resources business outsourcing, the statement said.
Maurissa Kanter, Hewitt spokeswoman, said, “It's too early to predict anything on job loss.”
The transaction is expected to generate $355 million in annual costs saving in 2013, primarily from reduction of management overlap and back-office areas, the statement said.
Ted L. Disabato, managing member, Disabato Advisers, an investment consulting firm, said he was surprised by the deal.
“These are two organizations of widely different cultures, and the most difficult thing in making an acquisition work is getting cultures aligned,” he said. “Aon and Hewitt have their work cut out for them. Aon was built on its insurance brokerage business and characteristics of the insurance brokerage business are a lot different than the benefits consulting focus of Hewitt …
“In a low-growth environment, you will see more of this (kind of consulting mergers and acquisitions),” Mr. Disabato said. “Companies can't grow on their own and you will see more of this as companies try to meet their business plans.”
R. Bruce Cameron, president and CEO, Berkshire Capital, an investment banking firm specializing in merger and acquisitions in the asset management and securities industries, said Hewitt “is a first-rate firm and one of the rare and one of the last and maybe the biggest (independent) player in the 401(k) and retirement consulting marketplace.” From an Aon perspective, to get a premium player like that it had to pay a large price, Mr. Cameron said: “From what we know it seems like a full price, not outrageous.”
“I don't know if this (Aon Hewitt merger) will cause a huge wave (of M&A activity),” Mr. Cameron said. There is a huge interest in defined contribution plan services, Mr. Cameron added. “People who deal with those plans are in a strong position” in the marketplace.
In terms of their own retirement plans, Hewitt has no defined benefit plan. It offers employees a 401(k) plan and a profit-sharing plan, whose combined assets totaled $2.6 billion as of last Dec. 31, Ms. Kanter said.
Aon froze its defined benefit plan to new accruals at the beginning of last year, Mr. Prosperi said. In return, the company doubled its contribution to its existing 401(k) plan to 6% from 3%. Its defined benefit plan had $1.3 billion in assets as of last Dec. 31, according to the company's 10-K report. The 401(k) has $1.5 billion, according to Pensions & Investments data.
Mr. Fradin in a teleconference said “just slightly under half the revenue of the combined entity is going to be the combined consulting operation.”
“We wouldn't be doing this deal if we didn't see the growth,” he said.