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By DAN REYNOLDS, senior editor of Risk & Insurance®

In its $4.9 billion purchase of Lincolnshire, Ill.-based Hewitt Associates Inc., Chicago-based Aon Corp. would change its benefits chemistry forever.

The newly formed Aon-Hewitt seems poised to make a strong run at as much of that benefits consulting business as it can get, particularly at a time of thin brokerage margins and soft property/casualty prices.

"The regulatory changes in healthcare and retirement surrounding healthcare reform increases the need for advice and solutions in the human capital space, and Aon-Hewitt will be well-positioned to serve our clients in this regard," said David Prosperi, Aon's vice president of global public relations, in e-mailed responses on July 16 to questions from Risk & Insurance®.

DIVERSIFICATION

Aon Consulting generated $1.3 billion in 2009 fiscal year revenue. The consulting unit was responsible for more than $1 billion of that, or 85 percent. The remainder, $191 million, or 15 percent, were generated from Aon Consulting's benefits outsourcing unit.

Hewitt's 2009 fiscal year revenues of $3 billion were more diversified. The consulting unit brought in more than $1 billion, or 33 percent of revenues; the benefits outsourcing division generated $1.5 billion, or 51 percent of revenues; and the human resources business process outsourcing unit generated $480 million, or 16 percent of revenues, according to Aon Corp.'s presentation to investors.

An Aon-Hewitt merger would generate more than $2 billion in consulting services, or 49 percent of revenues of $4.3 billion; $1.7 billion in benefits outsourcing, or 40 percent of revenues; and $480 million in human resources benefits process outsourcing, or 16 percent of revenues.

"We also expect the consulting business to rebound quickly with the recovering economy, and this merger will allow us to make investments in human resources capital to support this growth opportunity," Prosperi said.

The new mix, with Aon-Hewitt structured as a subsidiary of Aon Corp., would reduce brokerage revenues to 60 percent and increase consulting revenues to about 40 percent of total revenues, according to company officials.

Aon's new human resources consulting subsidiary with $4.3 billion in revenue would place it about $1 billion in revenue ahead of Mercer, Marsh & McLennan Co.'s human resources consulting subsidiary. Mercer reaped about $3.3 billion in revenues in 2009. Marsh also owns the management consulting firm Oliver Wyman.

THE DOWNSIDES?

"The Aon/Hewitt merger would sharply expand Aon's capabilities in human resource consulting and outsourcing, and it would give the firm a more balanced mix of insurance brokerage and consulting revenues," said Moody's Weekly Credit Outlook, in a note to investors on July 19.

The ratings agency noted, however, that the advantages of altering the mix in brokerage and consulting revenue would be offset in the short term because of the debt taken on to buy Hewitt. Hewitt's purchase price represents about half of Aon's market capitalization, Moody's said.

The challenge to become the best at one-stop shopping is also a big part of the reason for the acquisition, Prosperi said. The merger is expected to "accelerate" Aon's top-line growth and offer its risk and consulting clients a more diversified portfolio, a strategy in keeping with the wishes of Aon's CEO Greg Case.

The merger is expected to create $229 million in savings in 2011 and $355 million in savings in 2013 as the companies reduce or combine back-office functions, according to a note to investors on Aon's Web site. Aon also expects to take a restructuring charge of $168 million in 2011 associated with the merger.

An Aon-Hewitt merger creates a very strong player in the benefits administration outsourcing (BAO) business, said management consultant Peter Bendor-Samuel, a sector that has been buffeted by three major M&A's within the past month.

Given the seismic waves that healthcare reform is bound to create, the "unprecedented M&A activity" makes sense, said Bendor-Samuel, CEO of the Everest Group.

July 19, 2010

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