Aon Corporation and Hewitt Associates Merger: A Losing Bet
In the world of corporate mergers there are very few winners and the Aon Corporation's new merger with Hewitt Associates has a high probability of becoming a losing bet for Aon shareholders. On why the cards are stacked against Aon it is good to start with the macro view of mergers and acquisitions. Two-thirds of all M&A's result in a loss of value and share price for the acquiring company. The reason for the loss of value is known as the "winners curse." Rarely does the cash flow of a new company outweigh the premium of the merger and results in a loss of value for stock holders. There are a few exceptions to this rule, if the merger is a cash deal or if the premium is very low, however, this type of merger is fairly odd in the merger and acquisition world.
Looking at this particular deal it is hard to see a diamond in the rough. Aon Corporation makes 17 percent of its total revenues from human recourses and consulting services. Merging with Hewitt will triple its consulting services but this comes at a price. In a preemptive bid to acquire Hewitt, Aon is paying a 41 percent premium. To pay for the $4.9 billion dollar deal Aon is paying Hewitt stock holders half in cash and half in Aon stock.
This merger fits all of the criteria of a bad transaction. Aon paid a high price and is using cash and stock to pay that high premium. So far, stock holders are not pleased with Aon and the share price has already been knocked down 5 percent today.
Sources:
(Reuters)
http://www.reuters.com/article/idUKTRE66...Mark L. Shirower, The Synergy Trap, How Companies Lose the Acquistion Game (New York: Free Press, 1997)
Michael J. Mauboussin, Think Twice: Harnessing the Pwer of Counterintuition (Boston, Massachuetts: Harvard Business Press)