Last week, the world’s largest insurance brokerage, AON Corp. (AON) announced the closure of the merger of Hewitt, the leading provider of human resources outsourcing and consulting, with one of Aon’s subsidiaries, Alps Merger Corp. Hewitt will be integrated into Aon’s consulting services segment. Aon Consulting will operate the segment globally under the newly created Aon-Hewitt brand. The deal, which closed on schedule, is valued at $4.9 billion and has been financed by debt and stock.
The acquisition of Hewitt holds significant promise for Aon. It will bring greater diversity to the company’s brokerage business. However, since both brokerage and consulting businesses are economy sensitive, a continued weakness in the economy will adversely affect revenue growth rate.
Aon expects the acquisition to significantly add to its 2011 cash earnings and aid its GAAP EPS in 2012. The combined entity also expects to snip some back-office facilities and reduce management overlap, thereby generating nearly $355 million in cost synergies by 2013. Cost savings and revenue growth from the deal are expected to generate an operating margin of 20%.
As per the latest balance sheet figures, the combined pro forma total assets amounted to $30.8 billion, with stockholders’ equity of $7.8 billion.
Even though Aon has financed a major part of the deal with debt, the transaction will not strain its financial flexibility. Despite the debt-to-capital ratio going beyond 55% from 36% prior to the deal, we believe strong cash flows with minimal debt repayments ($100 million each in 2010 & 2011) in the near term will support the balance sheet.
Aon is a product of numerous large and small mergers, and acquisitions have been a major driver of growth. The company has taken advantage of the soft market conditions to grow inorganically. Also, Aon has had a track record of successfully integrating acquisitions, and this one in our belief will be no exception.
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