Aon Gains on MMC With Its $4.9 Billion Acquisition of Hewitt

Aon Corp.'s $4.9 billion acquisition of human resources and outsourcing company Hewitt Associates not only increases the insurance broker's top line, it also puts it more in direct competition with its top rival, Marsh & McClennan Cos., observers say.

With the acquisition, Aon's pro-forma business mix will shift from 83% of its revenues coming from insurance brokerage and 17% coming from consulting to 60% of revenues coming from insurance brokerage and 40% coming from consulting, according to a research report by Barclays Capital.

This would put it in more direct competition with Marsh. Marsh receives 50% of its revenues from insurance brokerage and 32% from Mercer, Marsh's human resource consulting and outsourcing company, and 12% from Oliver Wyman Group, Marsh's global management consulting firm, according to Marsh's annual report. The other 6% of Marsh's revenues stem from the company's risk consulting and technology segment.

The Aon/Hewitt transaction could also increases the pressure on the two insurance brokers/consultants in the race to be No. 1 in total revenues. Aon, which says it is the largest insurance broker in the world by brokerage revenue, falls to second place behind Marsh when ranked by total revenue.

However, the transaction is expected to add $3 billion in revenue to Aon's top line, which puts it neck-in-neck with Marsh in the race to be largest by total revenue.

With $7.6 billion in annual revenue for 2009, Aon Corp. was the second-largest global broker, behind Marsh & McLennan Cos., which had $10.5 billion in total revenue, as ranked by Best's Review magazine (Best's Review, July 2010). In the previous year, Aon had been the top global broker, based on brokerage revenue.

"Marsh has been the No. 1 broker in the world for so long, it's very important to Aon. They've been trying to catch up as long as they've been in existence," said Evelyn Wolovnick, senior insurance adviser with Diamond Management and Technology Consultants. Wolovnick, a former managing director at Marsh who worked for the company for 32 years, said "Being able to say that you are No. 1 in the world is a big deal."

It boils down to a few key words: image, confidence and perception, said Joseph Finora of Joseph Finora & Associates, a consultant who specializes in financial services marketing.

"When you are viewed as No. 1, people subconsciously think there must be a reason you are No. 1," Finora said. It's good for company morale, too, he said. "People take a lot of pride in being No. 1. People are competitive no matter what industry you are in. Everyone wants to win."

Aon and Hewitt announced the transaction on July 12, saying they'd create the largest human resources consultant in the world (BestWire, July 12, 2010). Aon said it intends to integrate Hewitt with its existing consulting and outsourcing operations, Aon Consulting, and operate the segment globally under the newly created Aon Hewitt brand.

"This is all about growth and building our firm for the future," said Greg Case, Aon's chief executive officer, during a recent conference call. He said 15% of Aon's new business comes from Aon Consulting. "This cross-sell opportunity is proven. The question is can we scale it? Hewitt gives us the opportunity to really scale it."

With one shot, Aon is expanding its knowledge base exponentially, which will appeal to new clients, Finora said. "Once they have their foot in the door with one product or service, ideally, they'll be able to take those existing customers and make them better customers by providing more products or services."

Matthew Sapaula, president of Matthew Sapaula Inc., a Chicago-based financial coaching firm, pointed to the benefits of the cross sell. "As more businesses are reeling back, it's becoming harder to find corporate clients willing to pay fees. This is another motivation for the merger."

Also, it increases Aon's global reach, giving it a strong foothold in India, he said.

Given Case's background -- before joining Aon, he was with international management consulting company McKinsey & Co. -- he should have a "good grasp of the dynamics of Hewitt," Jay A. Cohen, research analyst with Bank of America/Merrill Lynch, said in a research report.

The transaction also poises Aon (NYSE: AON) to tap into potential growth from health care reform, Cohen said. "The combined entities' emphasis on benefits consulting positions it well should health care reform drive increased demand for such services," Cohen said.

Russ Fradin, chairman and chief executive officer of Hewitt, will serve in the same role at Aon Hewitt, where he'll report to Case.

Owning 20% of Aon following the transaction's close was "one of the things that made the deal compelling from our side," Fradin said during the conference call.

The boards of both Aon and Hewitt approved the merger, which is expected to close by mid-November, pending regulatory approvals as well as approval by both Aon and Hewitt stockholders.

In a conference call, Fradin said Hewitt was never for sale, but that the company had considered expanding into the insurance brokerage business. "We had considered trying to pry Aon Consulting out of Aon," Fradin said.

But it was Aon who first approached Hewitt, Case said.

"This is not something Russ was looking for," Case said. "We reached out to him and his team, they started to see a real possibility."

Executives from both companies met a couple times a week for months to discuss how the two companies would fit together.

"We wanted to make sure it would work out on a granular level," Case said.

The companies said they are a good fit based on their existing human resources businesses. Hewitt has a strong presence with large corporations and Aon's big in the middle-market arena.

Hewitt works with more than 3,000 clients and their employees through three primary business lines: consulting, benefits outsourcing and human resources business process outsourcing. Case said he saw great potential for the combined company in several areas, and specifically cited Aon's risk management work with private equity clients.