CHICAGO (Bloomberg)—Aon Corp. was the biggest decliner in the Standard & Poor's 500 after agreeing to buy Hewitt Associates Inc. for $4.9 billion.

Aon fell $3.08, or 8%, to $35.26 at 12:09 p.m. Monday in New York Stock Exchange composite trading, the company's biggest drop in more than a year. The cash-and-stock deal values Hewitt at $50 a share, or 41% more than the consulting firm's closing price on July 9, Chicago-based Aon said in a statement Monday. Hewitt soared 32%, or $11.21, to $46.61.

“In the short term, it's a negative,” said Meyer Shields, an analyst with Stifel Nicolaus & Co., who has a “buy” rating on Aon's stock. “Integrations are always messy, and Aon is using an undervalued stock to pay for it.”

Aon CEO Greg Case is more than doubling the size of Aon's consulting business as rival Marsh & McLennan Cos. Inc. is scaling back its own advisory business. Consulting firms are under pressure to grow after benefits-consulting firm Towers Watson & Co. was formed this year in a $3.5 billion merger.

Aon will pay $25.61 in cash and 0.6362 of a share for each Hewitt share. Aon's share slide was the most since it fell 14% at the close of trading on May 1, 2009.

The purchase is Aon's biggest, surpassing its $1.4 billion acquisition of reinsurance broker Benfield Group Ltd. in 2008, according to data compiled by Bloomberg. The company, which earns commissions by matching buyers and sellers of insurance, is seeking to boost revenue with the purchase of Hewitt, which provides payroll and consulting services to 3,000 clients.

Moody's may downgrade

Aon may be downgraded by Moody's Investors Service on the deal, the ratings firm said in a statement. Moody's changed the outlook on Aon's Baa2 debt rating to negative from stable.

Aon will merge Lincolnshire, Ill.-based Hewitt with its Aon Consulting unit and rename the division Aon Hewitt. The company said it expects to reap $355 million in annual savings by cutting back-office costs and overlapping managers. Russ Fradin, chairman and CEO of Hewitt, will head the combined division and report to Mr. Case, who was a consultant with McKinsey & Co. before replacing Patrick Ryan as Aon's CEO in 2005.

“This is about growth and building our firm,” Mr. Case said on the conference call. “We really weren't exactly where we thought we might be able to be, which is why we started to think who would be the best partner in that space.”

Aon will cut jobs for “redundancies” following the transaction, Mr. Case said.

More consulting

Consulting revenue at Aon fell about 7% last year to $1.3 billion. New York-based Marsh & McLennan's consulting division, which includes the units Mercer and Oliver Wyman, posted about $4.6 billion in revenue last year, down 11% from 2008.

“It's definitely going to make them a much more consulting operation than they were before,” said Paul Newsome, an analyst with Sandler O'Neill & Partners L.P. in Chicago. “There's going to be some scale benefits. The other thing they get is better recognition. I think from a pure consulting perspective, Hewitt is a better name than Aon.”

Marsh & McLennan agreed to sell its Kroll security-consulting business for $1.13 billion in June. The firm, led by CEO Brian Duperreault, is expanding its flagship insurance brokerage business by acquiring smaller middlemen.

‘Broader portfolio'

Aon said it's paying about 7.5 times Hewitt's forecast earnings before interest, taxes, depreciation and amortization for the 2010 fiscal year. Credit Suisse Group A.G. and Morgan Stanley will arrange a $1 billion three-year term loan and a $1.5 billion bridge loan.

Credit Suisse acted as a financial adviser to Aon, and Citigroup Inc. advised Hewitt on the deal. Aon said it expects to complete the purchase by mid-November.

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