Filed by Aon
Corporation
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12
under the Securities Exchange Act of 1934
Subject Company: Hewitt Associates, Inc.
Commission File No.: 001-31351
Safe Harbor Statement
This
communication contains certain statements related to future results, or states
our intentions, beliefs and expectations or predictions for the future which
are forward-looking statements as that term is defined in the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from either historical or anticipated results depending on a
variety of factors. Potential factors that could impact results include: the
possibility that the expected efficiencies and cost savings from the proposed
transaction will not be realized, or will not be realized within the expected
time period; the ability to obtain governmental approvals of the merger on the
proposed terms and schedule contemplated by the parties; the failure of
stockholders of Hewitt Associates, Inc. (Hewitt) to approve the proposed
merger; the failure of the stockholders of Aon Corporation (Aon) to approve
the issuance of Aon common stock to Hewitt stockholders; the risk that the Aon
and Hewitt businesses will not be integrated successfully; disruption from the
proposed transaction making it more difficult to maintain business and
operational relationships; the possibility that the proposed transaction does
not close, including, but not limited to, due to the failure to satisfy the
closing conditions; general economic conditions in different countries in which
Aon and Hewitt do business around the world; changes in global equity and fixed
income markets that could affect the return on invested assets; fluctuations in
exchange and interest rates that could influence revenue and expense; rating
agency actions that could affect Aons ability to borrow funds; funding of Aons
various pension plans; changes in the competitive environment; changes in
commercial property and casualty markets and commercial premium rates that
could impact revenues; the outcome of inquiries from regulators and
investigations related to compliance with the U.S. Foreign Corrupt Practices
Act and non-U.S. anti-corruption laws; the impact of investigations brought by
U.S. state attorneys general, U.S. state insurance regulators, U.S. federal
prosecutors, U.S. federal regulators, and regulatory authorities in the U.K.
and other countries; the impact of class actions and individual lawsuits
including client class actions, securities class actions, derivative actions
and ERISA class actions; the cost of resolution of other contingent liabilities
and loss contingencies; and the ability to realize the anticipated benefits to
Aon of the Benfield merger. Further information concerning Aon, Hewitt,
and their business, including factors that potentially could materially affect
Aons and Hewitts financial results, is contained in Aons and Hewitts
filings with the Securities and Exchange Commission (the SEC). See Aons and Hewitts Annual Reports on Form 10-K
and Annual Reports to Stockholders for the fiscal years ended December 31,
2009 and September 30, 2009, respectively, and other public filings with
the SEC for a further discussion of these and other risks and uncertainties
applicable to our businesses. Neither Aon nor Hewitt undertakes, and each of
them expressly disclaims, any duty to update any forward-looking statement
whether as a result of new information, future events or changes in their
respective expectations, except as required by law.
Additional Information
This
communication does not constitute an offer to sell or the solicitation of an
offer to buy our securities or the solicitation of any vote or approval. This communication is being made in respect
of the proposed transaction involving Aon and Hewitt. In connection with the proposed transaction,
Aon and Hewitt will be filing documents with the SEC, including the filing by
Aon of a registration statement on Form S-4, and Aon and Hewitt intend to
mail a joint proxy statement regarding the proposed merger to their respective
stockholders that will also constitute a prospectus of Aon. Before making any
voting or investment decision, investors and stockholders are urged to read
1
carefully
in their entirety the joint proxy statement/prospectus regarding the proposed
transaction and any other relevant documents filed by either Aon or Hewitt with
the SEC when they become available because they will contain important
information about the proposed transaction.
You may obtain copies of all documents filed with the SEC regarding this
transaction, free of charge, at the SECs website (
www.sec.gov
),
by accessing Aons website at
www.aon.com
under the heading Investor Relations and then under the link SEC Filings
and from Aon by directing a request to Aon at Aon Corporation, 200 E. Randolph
Street, Chicago, Illinois 60601, Attention: Investor Relations, and by
accessing Hewitts website at
www.hewitt.com
under the heading Investor Relations and then under the link Reports &
SEC Filings and from Hewitt by directing a request to Hewitt at Hewitt Associates, Inc.,
100 Half Day Road, Lincolnshire, Illinois 60069, Attention: Investor
Relations.
Aon
and Hewitt and their respective directors and executive officers and certain
other members of management and employees may be deemed to be participants in
the solicitation of proxies in respect of the proposed transaction. You can
find information about Aons directors and executive officers in its definitive
proxy statement filed with the SEC on April 7, 2010. You can find
information about Hewitts directors and executive officers in its definitive
proxy statement filed with the SEC on December 16, 2009. Other information
regarding the participants in the proxy solicitation and a description of their
direct and indirect interests, by security holdings or otherwise, will be
contained in the joint proxy statement/prospectus and other relevant materials
to be filed with the SEC when they become available. You can obtain free copies
of these documents from Aon and Hewitt using the contact information above.
The
following is a transcript of the investor conference call held on July 12,
2010 in connection with the merger of Hewitt with Aon.
Operator
Good
morning, and thank you for holding. Welcome to the Aon Hewitt conference call.
At this time all parties will be in a listen-only mode until the
question-and-answer portion of todays call. Todays conference is being
recorded. If anyone has any objections, you may disconnect your line at this
time.
I
would now like to turn the conference call and presentation over to your host
for todays call Mr. Scott Malchow. Thank you sir, you may begin.
Good
morning. This is Scott Malchow, Head of Investor relations at Aon Corporation.
I am joined here today with Greg Case, Aons Chief Executive Officer; Russ
Fradin, Hewitts Chairman and Chief Executive Officer; and Christa Davies, Aons
Chief Financial Officer. Please refer to either Aons or Hewitts website for
the press release announcing the merger and the slide presentation that will
accompany this call. Todays call is also being recorded and will be a
available for replay via telephone for the next 30 days. The replay will be
available shortly after completion of the live call and can be accessed via Aons
or Hewitts website.
As
noted on slide two of todays presentation, this conference call and the
accompanying presentation contains certain statements related to future results
or states our intentions, beliefs, and expectations or predictions for the
future which are forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from either historical or anticipated
results depending on a variety of factors. Such statements are based upon the
current beliefs and expectations of management at Aon and Hewitt and are
subject to significant risks and uncertainties.
We
have described the factors that could cause actual results to differ from those
set forth in the forward-looking statements in the presentation accompanying
this call which is available on both Aons and Hewitts website and
2
which you should review. You should not rely
upon forward-looking statements as predictions of future events because these
statements are based on assumptions that may not come true and are speculative
by their nature. Neither Aon or Hewitt undertakes an obligation to update any
of the forward-looking information included in this document whether as a
result of new information, future events, changed expectations or otherwise.
Now
turning to slide three of the presentation, in connection with the proposed
transaction, Aon and Hewitt will be filing documents with the SEC including the
filing by Aon of a registration statement on Form S-4 and Aon and Hewitt
intend to mail its joint proxy statement regarding the proposed merger to their
respective stockholders that will also constitute a prospectus of Aon.
Before
making any voting or investment decision, investors and stockholders are urged
to read carefully in their entirety the joint proxy statement prospectus
regarding its proposed transaction and any other relevant documents filed by
either Aon or Hewitt with the SEC when they become available because they will
contain important information about the proposed transaction.
Aon
and Hewitt and their respective directors and executive officers may be deemed
under the rules of the Securities and Exchange Commission to be
participants in the solicitation of proxies from the stockholders at Aon. A
list of names of those directors and executive officers and descriptions of
their interest in Aon and Hewitt will be contained in the joint proxy statement
prospectus which we filed with the Securities and Exchange Commission.
Stockholders may obtain additional information about the interest of the
directors and executive officers and the proposed transaction by reading the
joint proxy statement prospectus when it becomes available.
Now
it is my pleasure to turn the call over to Greg.
Thank
you, Scott, and good morning, everyone. It is my pleasure to be here this
morning with our shareholders, our clients and our associates around the globe.
I am also very excited to be here with Russ and I am thrilled to announce that
hes agreed to join Aon as Chairman and Chief Executive Officer of Aon Hewitt.
To
begin I would like to provide an overview of why the team believes the merger
is such an extraordinary opportunity for overall Aon, just quite exceptional.
Then this [thought] will be followed a brief set of highlights of the
transaction. Next Russ is going to provide an overview of why the strategic
rationale is so strong, he will highlight the combined strengths of the product
portfolio, the substantial opportunities that exist for cross sel and the
increased client (inaudible) capabilities for associates all around the world.
Then
Christa is going to walk through why the economics of the transaction are so
compelling and then well open it up to all of you for questions.
Im
going to start you off just referring to page four. If you take a look at page four
what you see first of all is that Aon Hewitt as it comes together absolutely
strengthens the leadership position for Aon overall . When you step back and
think about what we have talked about on these calls many times before, it has
always been around how Aon becomes, how Aon is focused on being the preeminent
professional services firm in the world focused on risk and people. Upon the
completion of the merger, Aon will be a global leader in risk and human capital
solutions.
If
you think about it from a risk standpoint, number one in primary insurance
brokerage, number one in reinsurance, number one in captive management, a
leader in Affinity Programs, absolute preeminent position in the world on the
topic of risk. And as we talked before, the opportunities here are
extraordinary. They remain extraordinary and we are working actively everyday
to capture those and we are quite excited about those.
And
now you look at the right side of the page and you add to that now the
number one position in the world on human capital solution. Number one in
benefits admin, number one in HR business process outsourcing, a leader in HR
consulting be it employee benefits, retirement, investment consulting,
compensation across the board. When you think about the implications of Aon
Hewitt in the context of overall Aon, it is just extraordinary.
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You
have Aon at the top overall. Youve got Aon risk solutions, Aon Benfield and
now Aon Hewitt. From our standpoint you could not have picked a better partner
to continue the journey as we build this preeminent professional services firm
focused on risk and people.
Turn
to page five. I just want to highlight the particulars of the transaction
before turning it over to Ross. What weve got is Hewitt will merge with Aon
for a share price of $50 per share. It will be consisting about half it will
be half cash and half stock based on the closing price of Aon on Friday. The
consideration reflects a multiple of 7.5 times Hewitts 2010 consensus EBITDA.
As I said before, the results of Aon Hewitt is a global leader in human capital
solutions.
The
combined Aon Hewitt revenues will be $4.3 billion. We expect to deliver over
the course of the next few years a significant annual savings and synergies of
$355 million a year. But I want to stress I want to stress Aon Hewitt just
like Aon Benfield and Aon risk solutions is all about opportunity. Its about
growth and how we build the firm. Of course there are going to be some
redundancies as part of this but the focal point, our energies are really going
to be around how we build this and grow this and we are quite excited about
that.
We
expect the transaction to be accretive on a GAAP EPS basis in 2012, and on and
adjusted EPS basis in 2011 and significantly significantly accretive to cash
earnings in 2011. As you will see, this generates exceptionally strong cash
flow and not only is the level of cash flow increased substantially, the
flexibility where that cash flow comes from makes it even more attractive. So
overall, just an exceptionally strong cash position.
And
then of course in everything we have done as we have spent time on these calls
before, it has got to come back and make sense and be very compelling for our
shareholders . We expect to create $1.5 billion of shareholder value coming out
of this transaction in addition to strengthening the franchise that I talked
about before.
So
in short, as Aon and Hewitt come together, what we have is a combination that
really represents exceptionally strong strategic rationale, strengthens our
overall position across risk and people, puts us as a leader in human capital
solutions, great cross sell opportunities that are proven, they are clear
inside the current Aon portfolio and now with Hewitt added , becomes
substantially stronger and greater with a better ability, a stronger ability to
work with and help our teams on an individual client basis. So exceptionally
strong.
Underpinned
by economic rationale that Christa is going to describe which is very, very
compelling starting with the value creation of a $1.5 billion. In short, as you
can tell, we are quite, quite excited about the opportunity, quite excited
about the opportunity to partner with Hewitt. And I must say, I am
personally quite excited about the opportunity to work with Russ Fradin and his
role.
And
I would like to turn the call over to him to talk about some of the strategic
rationale underpinning
Thanks,
Greg. I can tell you that I am both honored and thrilled to be here today on
behalf of all of the Hewitt Associates and upon the closing of the transaction,
the new Aon Hewitt combined entity which as Greg said will be the absolute
leader in the human capital industry. And so we are pleased to be joining Aon,
which is truly the leader in its categories of risk management.
And
we share the commitment and probably the overriding thought that client service
is what drives everything we do. And we have seen it and the time we spent
together with the Aon people that they are as committed to superb client
service as everyone is at Hewitt and that will bring more of the service and
more of the thought leadership to a large number of clients around the globe.
We
believe that this combination creates a strong and compelling set of human
capital and investment consulting solutions across the entire industry. And as
I said, it really will be the global leader.
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Long
term, it significantly also enhances the value proposition for all of our
associates and the combined associates of Aon Hewitt. And as we know and as weve
always said creating a rewarding work experience for all of our associates is
what produces that superb client service. It gives them broader career
development, more advancement opportunities and the new entity will be able to
leverage the Hewitt brand, and I cant emphasize that enough, that as Greg and
I had these discussions, the idea of being able to leverage the Hewitt brand,
which is so well-known across large global clients and Aon which obviously has
a strong position amongst the midmarket clients and is growing its presence in
the larger clients is going to be a unique opportunity . And obviously we
expect to deliver strong financial returns as Greg has outlined.
So
it is not that often in life where you get a trifecta. This is a real win for
our clients, a real win for our associates and a real win for the shareholders.
As
I move to slide seven, let me just touch on the product portfolio. This creates
as I said the industry leader and you can see here from the slide that just
slightly under half the revenue of the combined entity, 49% to be exact, is
going to be the combined consulting operation. And we really believe that with
the great global footprint that Aon has and with our growing global footprint
that again, we can be a leader in that.
Combining
our benefits outsourcing assets produces an even stronger competitor in this
part of the market and we dont expect anything in this combination to affect
our commitment to the business process outsourcing space and the fact that we
are the leader there and will continue to grow that presence around the world.
And in fact, we are continuing to sign the commitments that we committed to as
we began our financial year and we dont expect that to change in any way,
shape or form.
In
terms of thinking about the business mix, it is also important to remember the
highly recurring nature of the revenue stream that this business produces. Even
in consulting we have been able to maintain and grow the actuarial practice,
the investment management practice, the health management practice and the only
thing that has really been impacted at all by the recession has been the
discretionary areas of talent and organization consulting. And even there as
you saw in our last quarter, that is beginning to bounce back. So we think that
even in consulting you get the recurring revenue and obviously in the long-term
contracts and both benefits outsourcing and business process outsourcing, you
get that.
So
as I flip over to slide eight, the thing that I like about slide eight is it
really crystallizes in very simple form the fact that we will be able to bring
real leverage to our clients and across the entire service line. And if you
look at the slide, all that it is saying is obviously our large and extensive
client base with global clients marries well with the Aon client base which is
a bit more midmarket focused.
If
you look at the product line, it gives us more products to cross sell.
Likewise, it will give the Aon folks more products to cross sell and so we are
excited and in many of the areas around the globe and even here in the US, we
had already been looking at opportunities in brokerage and risk management and
this now obviously very much advances that agenda around the world and it
allows us to take advantage of some of the trends we expect to create the wind at
our back in the US.
In
fact, before this transaction, the Hewitt shareholders will remember we had
already made an acquisition to be able to offer healthcare brokerage services
in the US to take advantage of Health Care Reform. So we are very excited about
the cross-sell opportunities [and] we wouldnt be doing this deal and Aon
wouldnt be doing this deal if we didnt see the growth in the future and that
is really what its predicated upon.
Finally,
if you flip over to page nine, it really is almost a side-by-side
comparison of what each of us brings to the party. And so as you flip through
the brand, the strength we have in benefits outsourcing, the leadership
position in BPO, the position we both occupy in health and benefits, the
retirement marketplace, and I would add the investment consulting portion of
that, which is very important to our future, the talent and the human capital
aspects and the great position that Aon has in some of the specialty
compensation areas including Radford & McLagan, that we are really
excited and obviously that we think its a terrific combination or we wouldnt
be sitting here today.
5
So
I hope Ive been able to convey a sense of the excitement at Hewitt based on
this. We are really just delighted to be partnering with Aon. And with that, I
will turn the call back to my new partner,
Russ,
thanks very much and I hope you can tell in listening to Russ, I think he
painted a picture exceptionally well as to how Aon Hewitt is coming together.
And in fact, you can also see how Aon Hewitt impacts global Aon. As we think
about what we are trying to accomplish, it really is an exciting story. Again,
number one in risk services, number one in reinsurance, number one in now
with Aon Hewitt, exceptionally strong.
I
do want to also emphasize that what Russ was describing has really come
together over a reasonably long period of time with the teams working together
extensively thinking about the opportunities and really kind of area by area
segment by segment thinking about where the opportunities were. Also with the
very active involvement of both Boards of Directors in the middle of this
discussion quite extensively for some period of time. So for us, this has
really been a tour de force and the more we kept pushing this, the more we kept
seeing opportunity after opportunity not only for Aon Hewitt for Aon overall.
And
I think Ross and his Board and his colleagues began to see the exact same thing
in the context of Hewitt. So that is why we are so excited about the
announcement today and so excited about working together.
In
addition, however, as is clearly tradition on the Aon calls, we also went to
talk about very importantly not just the strategic rationale which as Russ has
described is quite compelling, but the economic underpinnings of that. We want
to make absolutely certain that our shareholders understand the level of
conviction we have and the opportunity for them, how that is going to play out.
We want to make sure they are comfortable and understand how much time and
energy and effort have gone into that view, very, very specifically.
And
Christa is going to give you a quick overview on the economics and why we are
equally excited about those. Christa?
Thank
you, Greg. If you turn to slide 10, you can see that we expect to deliver $355
million of synergies by calendar year 2013. These savings represent about 10%
of the combined Aon Hewitts finance year 2009 operating expense base. And the
EPS accretion you will see shortly is driven primarily by cost reductions.
Therefore we believe there is very little execution risk associated with this.
You
can see that the $355 million of synergies will be phased in, 66% in 2011, 92%
in 2012 and 100% by calendar year 2013 . The expense reduction will be coming
in a range of areas, reduction in back-office eras and public Company costs,
overlap in management and front-office areas, and leverage of technology and
offshore capabilities.
It
is a playbook for delivering these savings that will be very similar to the
successful integration of Benfield which was arguably more complex where we
delivered savings ahead of the original integration schedule and costs were
below initial projections. We have a high degree of confidence in our synergies
and the overall restructuring program.
If
you turn to slide 11, you can see that we have now established a long-term
operating margin target for Aon Hewitt of 20% with the primary drivers of this
being the synergies, greater economics of scale, and improvement in the HR BPO
which Russ talked about.
We
will continue the positive trend that both firms have demonstrated over the
last three years which you can see on slide 11 of driving operating margin
expansion which has been very impressive in a very difficult market
environment.
6
Moving
to slide 12, you can see that the transaction delivers increased shareholder
returns. The GAAP EPS number will be accretive in 2012 and on an adjusted EPS
excluding restructuring charges, the transaction will be significantly
accretive in 2011 and substantially accretive in 2012 onward. We do expect the
transaction to be significantly, significantly accretive to cash earnings in
2011.
And
as we have continued to report to shareholders, we analyze each use of capital
on a return on invested capital basis and this transaction is significantly in
excess of share buyback, 100 basis points in excess of share buyback. So we
believe that it is the best return on capital for shareholders.
Moving
to slide 13, you can see that in addition to the synergies and strong our
return on capital characteristics, we expect that this will generate
significant cash flow generation to the Company. Aon and Hewitt generated $2.2
billion of total EBITDA in financial year 2009 and we believe this EBITDA will
expand substantially over the coming years driven by synergies and the enhanced
scale inherent in the businesses.
I
will note and reinforce what Russ said which is there is a high mix of recurring
revenue in this business and very complementary product portfolios which drives
much greater cash flow stability and growth in future years.
Moving
to slide 14. We expect that this transaction will generate $1.5 billion of
shareholder value primarily driven by the $355 million of synergies and these
synergies will enable the transaction to generate substantial value for
shareholders in a very short period of time. The transaction also utilizes
leverage of Hewitts underleveraged balance sheet which allows us to drive
strong cash flow generation while maintaining our current investment grade
rating of BBB+ BAA2.
Moving
to slide 15, you can see that the transaction will be financed with 50% cash
and 50% stock in order to maintain our current investment grade rating of
BBB+/Baa2.
The
credit benefits to the transaction include an increased revenue base, increased
diversity of revenue base and increased EBITDA and EBITDA margins over the long
term. Financing commitments for 100% of the cash consideration are in place via
a $1.5 billion bridge facility and a $1 billion bank term loan. All of the
financing is expected to be completed in the US including a $1 billion
three-year term loan maturing 10% year one, 10% year two, and 80% year three
with pricing at LIBOR plus 250 basis points. And we have a $1.5 billion bridge
facility in place and we expect to issue unsecured notes prior to drawing down
the bridge facility.
Finally
in terms of the transaction terms, Hewitt will merge with Aon for $50 per share
consisting on a fully diluted basis at 50% cash, 50% stock based on the closing
price of Aons stock on July 9, 2010. The aggregate fully diluted equity
value of the transaction is $4.9 billion consisting of $2.45 billion of cash
and the issuance of 64 million shares. The consideration reflects a a multiple
of 7.5 times Hewitts 2010 consensus estimates EBITDA.
In
terms of the timing, we expect the transaction to close by mid-November. There
are three major milestones to completion, preparing and filing joint proxy
statement and prospectus, receiving regulatory approvals and receiving
stockholder approvals.
I
will now hand back to
Thank
you, Christa. I just wanted to make one more observation before we turn it back
to you and open it up for questions and that is just when you take a step back
I hope you if you reflect, this is just a tremendous day, a tremendous day
for Aon and for Hewitt. And it is clearly in terms of the combination of Aon
and Hewitt very, very compelling.
But
I also want to emphasize for our shareholders who have participated in many of
these calls before the opportunity for Aon overall is extraordinary. If you
think about the opportunities weve got in the brokerage segment whether it is
on the risk side or the reinsurance side, they are tremendous. They remain
tremendous and are building.
7
Risk
under the leadership of Steve McGill, who has just done an exceptional and the
opportunists we talked about just continue to expand.
We
are capturing more and more of those and more excited than ever before about
what we are doing on the risk front. And then on the reinsurance front with
Mike Bunker and Dominic Christian and the team, Grahame Chilton, Mike OHalleran,
and the whole team in reinsurance is doing an exceptional job on the Aon
Benfield front.
And
what you really have is the risk platform as strong as it has ever been before
with more opportunity than it has ever been ever had before. And now you
combine that platform, that platform on risk with another platform that adds
also significant upside potential around Aon Hewitt. And what you really have
today is two platforms not one, two platforms with significant potential and
opportunity as we come together globally to be the preeminent firm in the world
focused on risk and people.
And
that is to say nothing about the potential now of greater interaction between
the two, the synergies that Russ described, two discrete platforms each of
which can generate substantial value with real upside around the synergy
potential across the two.
So
for Aon, for Aon just an exceptionally exciting day in terms of the next step
as we continue on the journey to build global Aon and be the preeminent firm in
the world on the topics of risk and people.
With
that, Russ and Christa and I would love to answer any and all of your
questions.
QUESTION AND ANSWER
Operator
Thank
you. (Operator Instructions) Brian Meredith.
UBS.
Good morning, everybody. A couple of questions here for you. First one, Greg
and Christa, on the 100 basis points in excess of share buyback, what are you
assuming as far as the commercial lines pricing environment and that assumption
that it kind of stays status quo where it is today?
Yes,
great question, Brian. We are assuming that insurance pricing remains negative
single digit exactly where it is today for the foreseeable future.
Okay,
great. And then the second question just want to understand the financing here
a little bit better. On the $1.5 billion bridge facility, I guess the
question there is, how do you protect yourself against refinancing risk with
that bridge facility here going forward and the event we go into a double dip
or something happens?
Yes,
so we have engaged with both Morgan Stanley and Credit Suisse on detailed
financing arrangements, Brian, and obviously one of the ways in which we have
mitigated that risk is by taking out the term loan of $1 billion. And
8
we
believe we have a very strong ability to get that note program in place well
before the bridge is before the transaction is completed.
Okay.
But then you still have the so the total cash consideration though is the $1
billion bank term loan and then $1.5 billion bridge. So you will still have the
bridge, right?
Absolutely.
Okay.
And then the bridge terms, is it a 12-month bridge financing, six months what
is it?
Yes,
12 months.
12
months. Okay. And so is it extendable or anything?
We
do not expect to draw on the bridge, Brian. We will expect to have the notes in
place
By
then, okay.
(multiple
speakers) transaction closing.
Got
you, all right. Thank you.
Operator
[Dan
Ferrell].
9
Hi,
good morning, its Sterne, Agee. Can you talk a little bit more about your view
on cash accretion? I know you said you thought it would be significantly
accretive. Do you have any preliminary numbers on what you think the
amortizable intangibles and the amortization pro forma would be for the
combination?
Yes,
Dan, we absolutely believe the transaction will be significantly, significantly
cash accretive in 2011. And as I said, we said the combination of Aon plus
Hewitt generated $2.2 billion of EBITDA in financial year 2009 and we believe
that will grow substantially.
In
terms of intangibles, the intangibles will be $259 million a year roughly in
2011 onward. And if you look at the purchase price, this $4 billion excess, $2
billion goes to goodwill, $1.9 billion goes to intangibles.
Okay
and that is and the annualized amortization would be how much then?
259.
Okay.
Okay, thank you. And then can you talk a little bit about your ultimate goals
and the margin targets. Is that primarily on expense driven just how you are
getting to sort of 20% for overall for this business?
Yes,
it is absolutely related to the synergies in the deal. So we believe we can get
to that 20% margin target simply through the synergies from this deal. But as
Russ described, really the greatest upside of bringing Aon and Hewitt together
is the revenue synergies related to the potential of driving the Hewitt brand
and assets through our consulting and risk distribution channels and vice
versa.
Dan,
its Greg. As you think about the logic of this, again governing thought
overall, this is all about growth and building our firm for the future. We are
very excited about how this comes together and how we can do that. And then you
think about the synergies in two pieces. One, really are the cost synergies as
Christa has described. That is all that you see in the deck. So 355 is all
around basically for the most part all around cost. That is what drives the
20%.
What
Russ described, the upside the real excitement is really beyond all of that and
that is how the businesses come together. So we want you to think about first
of all, governing thought one, this is about growth and building our firm. And
then in terms of synergies, two parts. One is more expense, one is more growth
and upside and all you see in the deck is the first part of the synergies.
10
Okay.
And just one other quick question. Can you talk a little bit about how
cross-selling has worked historically between the outsourcing consulting
business and the risk management business?
Yes,
this is one of the pieces and I will just comment and ask Russ to comment as
well. This is where you are back to kind of again remember even if it didnt
occur, the economics you see in the deck show up and that is exactly what it
comes out in terms of the overall effort. But the real excitement here, if you
think about our consulting business at Aon right now, a full 15% give or take
of our new business every year comes from ARS, comes from our risk business
directly.
And
when you think about it that is proven, we know that works, we know exactly
where and how that works. And now we are going to bring to bear across our
entire risk business, all of the capability weve currently got, which is
formidable , but now we also add the Hewitt brand, the pristine Hewitt brand
known globally around the world, we add the Hewitt capability, we add the
Hewitt content. And we are able to actually deliver even more to our clients on
a per client team basis than ever before in this combination.
So
this is why we love the idea of the fact that this cross-sell opportunities is
proven. The question is, can we scale it? Can we scale it? And what Hewitt does
it gives us the opportunity to really credibly scale. And I will give you one
example.
In
private equity, we serve many many private equity firms in the world today on
risk. If you look at the top 35 equity firms, we maybe have three or four that
we serve with benefits and things around consulting and human capital. And the
opportunity if you think about it in the private equity world is substantially
on people, maybe as substantial on people as it is on risk. And yet we have
very, very small penetration but we know there is a compelling value
proposition. We cant wait to take Aon Hewitt into the context of our private
equity clients.
You
know, if we can increase two or three or four given they are already clients
and already they are on risk, we think that can be very compelling. And there
are many, many others weve talk about. I want to emphasize again as I
mentioned, there has just been a tremendous amount of work that has got into
bringing us to where we are today.
We
work with the joint teams, we spend a lot of time in workshops together
thinking about where there would really be opportunity and how it would come
through. And we have identified a number of specific areas where again this is
all about how we scale this, not proving whether it works [at all].
But,
Russ, would love your thoughts on this as
Well,
from a Hewitt perspective, it is pretty simple. I mean I think everyone knows
we have operated as one firm around the globe and we are pretty well known for
that. If you look at our largest clients, the business process outsourcing
clients, they are virtually all benefit outsourcing clients and consulting
clients.
you
look at the benefit administration and outsourcing clients, they are virtually
all consulting clients.
And
so I think Hewitt people are pretty well attuned that they are looking at the
broad range of things that they can offer to their clients. And what I was
mentioning in my remarks is in terms of the future and if you think of this
over five or 10 years as opposed to one or two years, we will were already
looking out in a long-term strategy sense to the risk arenas. And it is very
clear that there is more thats going to go on in the brokerage world, its
obviously going to impact healthcare, already is impacting healthcare in the
US, we were already moving in that direction.
11
If
you look at some of the key emerging markets that we were looking to enter, we
are obviously looking at brokerage opportunities because that is the way
business is done in our marketplace in places like Brazil and China and India
and some of the key emerging markets.
So
I think that it really is about the very long term and how we build the firm.
You know, we are going have to have the crosstraining. We are going to have to
have the right incentives in place. That will take a little bit of time. It is
not going to happen with a snap of a finger. But it is about building the
future, and that is why we are so pleased.
Great,
that is helpful. Thank you very much.
Operator
Meyer
Shields.
Thanks,
its Stifel Nicolaus. Good morning, all. Christa, let me start with one
question for you. If the $355 million of expense synergies is enough to get to
20% margin, does that mean you are expecting a 20% margin by 2013?
Yes,
we have not given a timeframe on that 20% margin. It is a long-term target,
Meyer, very similar to the way we set our brokerage margin target. So we have
not given a timeframe around it.
Right.
No, I understand that you havent. Im just wondering what I would be
missing in terms of that expectation.
Yes.
Look, I guess what I would say, Meyer, is we do believe that we have a
process in place to get there. I think there are a number of components again.
There are synergies is one, the improvements in the HR BPO business, which Russ
and [Tain] have been terrific at driving. So we absolutely see line of sight to
a margin target, we have not given a timeframe around that.
Okay, I
understand. And I guess [get] a little commentary, we have been in talking to
our consulting segment analyst and hearing a lot of pressure from ACS in terms
of pricing from benefits outsourcing . And I was hoping that maybe Russ could
explain
We
were breaking up a little bit, Meyer. One more time on that?
12
Sure
Pressure
on benefits outsourcing.
Yes.
Price pressure.
Okay.
I think that from our perspective just to build on what Christa was saying, I
think when I started, which was sort of the fall of 2006, I think Hewitt
was reporting margins of 7% or 7.4%. I think in the last few quarters, we have
been reporting margins in the mid-teens something around the 15% or 16%. So the
targets that we are putting out there I think we have shown a proven track
record that we can continue to get to those margin gains over time.
To
your question in terms of what is going on in benefit outsourcing, there were a
very large number of transaction that occurred in the midst of the great
recession. And so Citibank got sold to ING; EDF got sold to HP; and EDS had a
benefits outsourcing subsidiary that was part of it. ACS then got sold to
Xerox. HP then spun off its benefits outsourcing subsidiary now to the combined
ACS Xerox. So it has been an interesting time.
And
during that time of tumults, there is a fair amount of stuff that weve seen
out there that I have talked about on the conference calls. It really does
appear now that my words that the large transactions are all done that I
would expect over time a return to the business as normal environment.
I
would also point out as youve probably seen if you are looking over our
results, that even during that time of tumult, we continued to show a level of
growth and a level of margins in the mid-20s that we are quite proud of. So we
have also shown that even if there is pressure that we can withstand that
pressure. And you can probably see, and one of the things I think that Aon is
looking forward to is we have been by far the most successful at building the
outsourcing capability in India.
We
are now adding a reasonably substantial capability and pull in to be able to
cover the Western European side of the world. And so whether there is pressure
or not, I dont want to predict the future but what I can tell you is we
have shown a great capability to deal with that pressure. But now that all of
the tumult and the to-ing and fro-ing appears to be over, I would expect
my words a more normal environment.
Meyer
Shields
Okay.
And I guess one technical question. If right now it looks like Aon is going
to trade down today. But assuming that that sort of things happens, the
[0.6362] of an share Aon share, is that fixed or would that ratio have to rise
?
13
It
is fixed, Meyer.
Okay.
It
is a fixed ratio.
All
right, perfect, thank you.
Operator
Jay
Gelb.
Thank
you, Jay Gelb from Barclays Capital. I wanted to circle back on the assumption
that the deal would be accretive to adjusted EPS in 2011. Christa, is there any
way to break down what that would mean from a revenue and margin perspective to
get there?
Jay, I
think the main thing that is driving that is simply the synergies. And you can
see the synergies per year on slide Im just bringing it up slide 10 of the
deck. And so that is the main thing driving the adjusted number.
And
then the only difference between the adjusted and the GAAP number is the
restructuring numbers. And you can see those $168 million in 2011 and $81
million in 2012.
Wont
the expense savings on page 10 it looks like $229 million, $242 million
basically be offset by the increase in tangibles? So Im just not maybe I am
missing something. How [else] is there to get there?
Right.
So, Jay, maybe we should take this off-line. But there are a number of
adjustments you need to make to your model. So we can probably take you through
them one by one and sort of describe how we get to an adjusted number that is
positive in 2011. Is that helpful?
14
Sure,
that [might] do it. And then for Greg, maybe you can talk a little bit about
how the deal came about. I pulled up Russs bio real quick and saw he is a
McKinsey alum as well. So if you could talk a little bit about how the deal
came to Aon. Was it just negotiations between the two companies or was the
Hewitt business shopped? Any insight would be helpful. Thank you.
Yes, I
would be happy to talk about that, Jay. And then again you and Christa should
feel free to circle back. Weve got actually a detailed layout of exactly how
you could reconcile on the GAAP accretion number so you will have that exactly.
On
the history here, this has actually been a fair amount of development over
time. And I want to stress Hewitt was doing is doing exceptionally well,
continues to do exceptionally well. This is not something that was shopped in
any way, shape or form at all. This is something we have been thinking about
for quite some time. And as you can imagine, Jay, if you think about our strategy
around being the preeminent firm in the world on risk and people, we have made
tremendous progress across all three. And I really want to emphasize that our
consulting colleagues have done a great, great job.
But
if you think about throwaways and the ability to really affect the global
economy, what we have got in risk is truly second to none, in retail and in
reinsurance, second to none. And what our teams there have done and what they
have in process personally I am just incredibly excited about. It really is
value that is clear and therefore us to capture and I think were in very good
place to do that and that will be terrific for our shareholders.
We
did not have we did not have a platform on the consulting front that could
actually create as much impact in the fullness of time. It could do
exceptionally well and it had done exceptionally well but it wasnt exactly in
that place.
By
the way, we had wonderful strategies going forward. Had we not done this had
we not done this merging, it would have worked out great and we will do
incredibly well in the context of that. But we really werent exactly where we
thought we might be able to be, which is really why we started to think about
who would be the best partner in this space.
And
weve been thinking about that over the course of the last say quite some
time. We are talking about many, many months here over the last year. And we
thought as we went through it that really there was really only one partner out
there that had the right brand, that had the right client service and ethic,
that really had the rright global stance that really, really made sense for Aon
that would really fit in and really be part of the overall Aon strategy to help
drive client value.
I
mean the values here as you listen to Russ articulate them or just go and read
them on the website, talk to Hewitt associates and very, very consistent with
what we are trying to do. And so we actually began the process and it really
has been, I would say, Russ, been very much a methodical process just the
two of us working over a period of months.
When
we initially got together, I would say this was not something that Russ
was looking for. I think Russ will say that. I will underscore that. This is
something that he started really getting into by the way, they had thought
about brokerage too so this wasnt a foreign concept to them. In fact, they saw
real potential but again they like us instead of great strategies in place to
build value for their shareholders and for their associates and for their
clients, and we had the same thing and consulting.
15
But
when we started to talk to Russ about it and we absolutely reached out to him
and in his team, they started to see real possibilities. And I think that
evolved over a period of a month or two. And then we decided after having
involved our Boards quite extensively that we still werent ready. We really
wanted to make sure it worked at a granular level that really we could see
the client segments, we could see how it helped associates, we could see how it
helped our shareholders.
And
we engaged in a series of leadership workshops, obviously very, very very,
very small but the senior, senior level executives across both firms. And we
literally sat, Jay, for a number of days just literally going through different
opportunities and we did that over a period of weeks. And we did kind of a one
or two sessions a week for a period of weeks and really , really got granular
about exactly how this was going to work.
Now
I must tell you, and Russ can comment too, we got more we understood Hewitt,
the more it confirmed our going in hypothesis, the more we got excited about
the combination and what it could mean for global Aon. And it was really at the
time after spending extensive time together and really understanding where and
how we could actually build our business together that we really fully engaged
the Board process. We obviously had both Boards had been involved from the
beginning but really started to ramp that up over the last few weeks.
And
it led to a unanimous decision on both Boards front to move forward and it
really has been an extensive, exhaustive process. By the way, not one that we
would have been sound very attractive had it been had it been shopped. And
I dont think Russ would have as well. But this was very much about us reaching
out and us coming to a conclusion together with Russs leadership, his input,
his guidance and that of his team. But this was really a great opportunity.
But,
Russ, ask you to comment on that as
I
think from our perspective it is interesting because Hewitt was never for sale.
And from our standpoint, we were building a very strong stand-alone strategy.
In fact, it would probably be no great secret given the size of this industry
that we had considered the thought of trying to pry Aon Consulting out of Aon
because we saw the merits of the combination.
So
when we began the more detailed conversations, it was awful hard to argue that
there wasnt a compelling strategic reason to do this. Because frankly it is
one of the things that had been on our radar screen. I think that as Greg
characterized that our Board went through an incredibly, incredibly thorough
and thoughtful process because I do think that this was not necessarily the
track we were headed down. And so we went through a very thoughtful process of
looking at our stand-alone strategy and what that would look like. And from
every angle we examined it, it turned out that combining the assets with Aon
Consulting was going to yield a better result for shareholders.
And
in fact, the idea that it was our ability also to get and frankly a
substantial part of the equity and 20% of Aon going forward was one of the
things that made the deal compelling from our side. That that allowed us to
participate in the upside and allows our shareholders to participate in the
upside.
But
as Greg said, we really were not for sale. Something that I think we really
thought about at a very deep level, the management, the Board all went through
an incredibly thorough and thoughtful process. I think the workshops were very
helpful in thinking through all of the things that you are seeing here today in
terms of could we get a better result for our clients? Could we get a better
result for all of our associates and could we get a better result for
shareholders?
And
that is why I said, I mean we really were able to answer in the
affirmative to all three constituencies that we really could produce a great result
and that is why I said at the outset that I really am thrilled that Ive been
asked to stay on and to lead this because I think it will be a great outcome.
16
Thanks.
And I just wanted (multiple speakers) yes it was. I just wanted to ask one
more time if there is anything else we can add from a financial perspective on
the 2011 accretion, just after I asked the question, Ive gotten [pinged]
from a number of investors. So is anything else to add now while Ive got you
on the line?
So,
Jay, the way you get the number to be adjusted and its obviously slightly
accretive in 2011 is you see the savings numbers on page 10 of the deck,
you offset with the intangible amortization and obviously there is business
improvement above the consensus estimates that get you to an adjusted positive
number.
Okay.
What is a business improvement?
It
is improving the business you know both revenue growth above consensus, margin
expansion above consensus.
Okay.
I will follow with you on that.
Thanks.
Operator
Paul
Newsome.
Good
morning. Focusing perhaps a little bit more on the 20% goal. The achievement of
that and I apologize I got myself a little confused it requires more than
just cost cuts. Is that correct?
That
is correct.
(multiple
speakers) you use both above and beyond what we would ordinarily expect from
the two companies individually?
17
Yes,
and, Paul, the 20% is a long-term margin target for the consulting segment in
the same way we have a 25% long-term margin target for our brokerage segment.
It is dependent upon expense cuts and obviously the improvement in the BPO
business that Russ described.
I
guess relatedly, it looks like this acquisition is going to make Aon more
economic sensitive, perhaps a little bit less insurance cycle sensitive. To
what extent are we counting on the economy improving to achieve some of these
targets both the near-term accretion that as well as the long-term 20%
target?
Well
lets if you take a step back, I will just back to on the brokerage side
as we talked before. When we think about overall where we are, as we said on
the brokerage front, it has been impacted by the global economy quite
extensively. But it is not about the pricing cycle. As we have said before, we
have been able to grow the brokerage segment irrespective of pricing over the
last five years that has gone down 5% to 10% real every year. We are going to
continue to do that.
The
brokerage piece from our view irrespective of the cycle we are going to we
are committed to going through. Obviously the impacts of the cycle plus the
economy has a significant impact on brokerage overall. And we are going to keep
working the fight through that as well.
We
think the growth prospects are actually quite significant and remain very
compelling from that standpoint. What I would say and I want Russ to comment on
some of the impact of the economy and where we are and any concerns you would
have about what if we have a double dip, etc., I would actually
reflect on two things before Russ comments.
One
is that look at both firms over the course of the last two years. Both firms in
one of the most difficult economic environments that we have ever had over the
last few years, have both firms have held up exceptionally well. So
irrespective of what happens over the next two or three years, you can expect
both firms to repeat performance in terms of fighting very hard against the
headwinds of the global economy. We have both done it very well. It is one of
the things that attracted us in addition to all the attributes I described
before about Hewitt, they have just done an exceptionally good job of fighting
through and we have done okay as well.
The
other piece I would highlight is about 80% of the revenue we are talking about
here is recurring revenue. So in terms of how it is worked and the retention of
it is actually very, very good characteristics. Another reason why we feel so
good about the economics. But, Russ, a thought on that?
Well,
a few things. First, in terms of the 20% goal per se, remember that as we go
into this acquisition now and as we join forces with Aon that you remember that
our BPO business is just going through breakeven and is now what I would call low
single-digit margins. And think of that as sort of a 4%, 5% margin at this
point that we have said consistently on all of our calls and we have
demonstrated a track record that that margin is going to get to the mid teens.
So
even in addition to the synergies and obviously our corporate costs going away,
blending together the IT infrastructure, using the Indian outsourcing to a
greater capability, using supplier synergies and youve got to realize
18
that
in most of the major cities around the world now are going to have overlapping
real estate locations. So I mean even factoring all of that in, that beyond the
one-time synergy, which is going to be substantial, we were moving toward lift
in our margin structure anyway. So I think that is important to consider.
And
then if you look at combining that with the Aon side, obviously on the
outsourcing side of their business, they have not had quite as much success as
as weve had and we believe as we combine those businesses that that alone
again will give margin lift to the Aon side of the equation.
So
there is a lot of things there that are independent of the economy to make that
clear meaning that these things are things that can be achieved regardless of what
happens.
Now
for those of you on the call that were Hewitt investors, I would ask you
to remember that we just dont make forecasts based on a big balance in the
economy. We have always been conservative. If you look at our revenue guidance,
every step of the way we have the one that has been out there saying, look, we
are going to run our business as if the recession and all of those sort of
things are there and its a reality. And even with that, we have been able to
meet those headwinds and do a lot better than most in terms of the revenue
picture.
So
again to Gregs point, to me if there is something of an economic turnaround, I
view that as upside meaning we are not going to plan our business and begin
making investments that are substantially ahead of the demand picture
environment. We are going to recognize that.
And
this is another example just listening to the discussion here, and then reflect
on the conversations we have had with the Aon shareholders on our calls, think
about what Russ just described in the 20% margin. Basically said, look , we are
going to achieve the 20% margin irrespective of what happens in the overall
economy. Obviously the economy can impact timing tremendously. If there is a
big bounce, it makes a big, big difference.
that
approach, add to it the synergies and the opportunities, that is a great
opportunity.
Think
about, by the way, though, the reason this should have a lot of credibility
with you think about the conversation weve had around brokerage margin? We
said we were going to achieve a 25% brokerage margin. We said we were going to
do irrespective of the insurance cycle, the pricing cycle. And we said we would
do it irrespective of the overall economy but the economy would have, what? A
big impact on timing.
So
if interest rates came back much more quickly, it would actually impact our
brokerage margin significantly. If the economy bounced up, it would impact
insured value which would impact our ability to achieve a 25% margin. But
irrespective , if you assumed the economy stayed exactly where it is today,
exactly where it is today, we would in fact achieve and have line of sight, a
game plan, an action plan on how to achieve a 25% of brokerage margin.
We
have exactly the same conversation and against a 20% margin on the consulting
space. And what has been great about this is as we have engaged with Russ and
all of his team, they think about it exactly the same way we do. So that is why
we are quite comfortable today saying hey, we are going to be 25% in brokerage,
we are going to be 20% in consulting and we are very comfortable on getting
there. The question
Thank
you very much.
Operator
Adam
Klauber.
19
Thanks,
good morning. Adam Klauber with Macquarie. Dont mean to beat this to death but
just a follow-up. So, do you think you can make the accretion goals if revenue
is relatively flat in the consulting segment over the next two, three years?
Yes,
Dan yes, Adam, sorry. Because the accretion goals are based on achieving the
synergies and as Russ described, improvements in the business that are
regardless of the economic environment. So we have not to reinforce, we have
not assumed that the economy bounces back. We just dont plan that way. And so
regardless of what happens in the economic cycle, we believe we can make these
accretion goals.
When
we just think about it as we took a good detailed understanding of the baseline
business on both sides, added the synergies , which are largely expense based
and we get to an answer that Christa has
Okay,
thanks. And one or two quick follow-ups. What is the likelihood of more sizable
consulting deals in the future?
Well,
what we would say is again if you step back the fundamental the fundamental
approach we take to capital allocation, as Christa has described many times,
starts and stops with return on invested capital. It has got to work for our
shareholders period. It is why we have done so much stock buyback over the
course of the last few years and why that remains an incredibly, incredibly
attractive investment for us. And will continue to be an incredibly attractive
investment going forward. And in fact, will have more capacity when you think
about it in the fullness of time around share buyback.
Having
said that, we will look for opportunities to improve return on invested
capital. Obviously when you think about where we are today and what we have
just done with Aon Hewitt, we feel incredibly good about this platform in Aon
Hewitt. It is as we described from the beginning, a tour de force.
One
of the things that is interesting and I will tell you we have briefed our teams
over the weekend and we have briefed our ARS teams, Steve McGill and Mike OConnor
briefed our risk team on Saturday and Dominic Christian and Mike Bunker and
Michael OHalleran and Grahame Chilton briefed our reinsurance team, and I will
tell you they are incredibly excited about this. And they see this as an
opportunity to invest into overall global Aon, the capacity and the cash to do
that over time they see as quite exciting.
They
recognize that things have to beat share buyback as they always do and always
will have to do. But they see it as tremendous, tremendous opportunity to build
globally Aon.
One
of the things that was so gratifying about this is seeing how clearly and how
quickly our colleagues in risk and reinsurance saw the opportunity first of all
in the platform called consulting or in human capital and human capital
solutions and saw it as so powerful and in outsourcing and saw that as so
powerful.
20
And
then saw, my gosh, the combination generates a level of cash and investment
potential to invest in innovation and growth in ways that are really
unprecedented at Aon. So it really is a set of opportunities across the board
and I would say for the time being we feel very good about where we are on the
human capital space.
Great.
And just last quick question. By the end of 2012 or 2013, how much acquisition
related debt do you expect to still have on the books?
So
you can see, Adam, that we have the term debt being paid off completely by year
three, 2013, so that $1 billion will be paid off completely by then. So we
would remain with $1.5 billion in debt at that point.
Okay.
Thank you very much.
Operator
This
concludes todays call. Mr. Case, do you have any final remarks?
I
dont. But I would say over I would just say overall again that we appreciate
everybody joining on this special call today. I just wanted to say again to
Russ and all of our all of our new associates from Hewitt, we are just
thrilled to be working with you closely. We are looking forward to the future
with you and what this means for global Aon both on the risk side, the
reinsurance side and on the human capital side. And just again, appreciate all
of our investors and associates joining the call today. Thanks very much.
Operator
Thank
you for participating in todays conference. You may disconnect at this time.
21
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