2nd UPDATE: Aon To Buy Hewitt In $4.9 Billion Cash-And-Stock Deal

Aon Corp. (AON), the world's largest insurance broker, agreed to buy human-resources firm Hewitt Associates Inc. (HEW) in a cash-and-stock deal valued at about $4.9 billion.

The deal, the largest in Aon's history, will nearly triple the size of the company's human-resources operations, making it a $4.3 billion business by revenue. Aon Hewitt, as the combined consulting and outsourcing operations will be known, will be run by Hewitt Chairman and Chief Executive Russ Fradin.

The transaction, expected to close by November, valued Hewitt at $50 a share when announced--a 41% premium over Friday's closing price. The announcement sent Aon shares down 8.3% to $35.17 in midday trading, which will lower the price paid per Hewitt share. Shares of Hewitt jumped by nearly a third to $46.58.

Aon, headed by chief executive Greg Case, has acquired dozens of firms to expand its insurance and human-resources arms. The latest deal gives Aon a human resources operation to rival competing brokerage Marsh & McLennan Cos. (MMC), whose Mercer and Oliver Wyman units had combined consulting revenue of $4.6 billion in 2009.

"Aon is focused on being the pre-eminent professional services firm in the world," Case said in a conference call with analysts and investors early Monday. "You could not have picked a better partner as we continue the journey" toward that goal, he said.

Aon will issue 64 million shares and pay $2.45 billion in cash, a structure that it said should allow the company to maintain its current credit ratings. The cash will come from a $1 billion bank term loan and a $1.5 billion bridge loan that Aon plans to replace with the issuance of unsecured notes.

Still, Moody's Investors Service moved its outlook on Aon's Baa2 credit rating to negative, with analyst Bruce Ballentine saying the funding for the deal "would more than double Aon's debt burden and reduce its financial flexibility, at least in the near term."

But the ratings company and equity analyst Brian Meredith of UBS both noted that the transaction also makes Aon less exposed to the commercial insurance pricing cycle. Aon's insurance brokerages, with revenue of $6.2 billion last year, collect fees for matching insurance buyers with the companies that sell the coverage. Those fees often fall when the price of the coverage drops--as it has for most of the past decade.

The latest deal dwarfs the Chicago-based company's previous largest transaction, the $1.4 billion acquisition of reinsurance broker Benfield Group Ltd. in 2008. Hewitt has 3,000 clients, and 49% of Aon Hewitt's operation by revenue would be from consulting. Another 40% would be benefits outsourcing.

Aon said the cost of the deal will cut into its profit next year, but that operating profit will rise when restructuring-related charges are removed. With those costs included, profit is projected to increase starting in 2012 as a result of the acquisition.

The companies expect the deal to save about $355 million annually by 2013, mostly from reduction in back-office areas and other effects. The combined operation is targeting an operating margin of 20%.

Unless otherwise requested, stockholders would get $25.61 and 0.6362 share of Aon stock for each share of Hewitt.

If the merger agreement is terminated, Aon is required under certain circumstances to pay a fee to Hewitt of as much as $225 million, according to a regulatory filing. Under other circumstances not outlined in the filing, Hewitt could owe up to $190 million to Aon.

In April, Aon said its first-quarter earnings dropped 36% after $126 million in year-earlier tax gains, though its adjusted earnings rose and topped analysts' forecasts. Meanwhile, Hewitt in May said its fiscal second-quarter earnings fell 15% on charges and a year-earlier gain as revenue increased and adjusted results rose.

-By Erik Holm, Dow Jones Newswires; 212-416-2892; erik.holm@dowjones.com

-By Nathan Becker, Dow Jones Newswires; 212-416-2855; nathan.becker@dowjones.com

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