Like many companies these days, Aon, the $8 billion risk-management, insurance, and human-resources consulting firm, has lots of excess cash. Unlike many, however, it knows exactly how it wants to allocate it: to buy back shares.
To be sure, the company isn’t completely single-minded about buybacks. In its quest to become the biggest risk and human-capital advisory firm in the world, Aon has made two major acquisitions in recent years. In 2008, it bought Benfield, a leading reinsurance broker, for $1.4 billion. And last fall it acquired Hewitt Associates, a prominent brand in the employee- benefits administrative and consulting arena, for $5 billion.
But Aon believes it can generally get more bang for its buck via buybacks. Under a share-repurchase program that began in 2005, the firm’s board authorized the repurchase of up to $4.6 billion worth of outstanding common stock, a target it has nearly reached: as of the third quarter of 2010, the firm had bought up $4.4 billion. There are no worries about reaching the limit, however: last year the board authorized a new buyback program of up to $2 billion.
When it comes to budgeting and planning, Christa Davies, Aon’s CFO since March 2008, adheres firmly to that corporate directive. “For us to spend cash on anything else, it has to beat share buyback, which sets the bar for all other capital investments.” We asked her to explain why.
What drives your overall decision-making around cash?
We are a very cash-generative business, and require very little capital to run. When we think about optimizing our return to shareholders, return on invested capital [ROIC] is our main metric. We use cash-on-cash to measure that return. If you think in terms of mergers and acquisitions, cash-on-cash is the return that M&A generates on a cash basis over the cash we’re spending on M&A.
We think about that ROIC for each form of investment, whether that’s M&A, organic investment, or the firm overall. We’re trying to drive an improved return on capital in every investment decision, as well as holistically for the firm.
You have a strong commitment to buybacks, but what else have you invested in?
The big uses of cash for us include organic investment to drive increased content and capability for clients. We’ve invested more than $800 million over the last five years in content and client-facing capability, such as GRIP, our global risk insight platform, where we now have more tan $40 billion of premium [transactions] in one database. In terms of M&A, we’ve changed the portfolio of the firm quite a lot to optimize return on capital. Acquiring Hewitt and Benfield, and disposing of our insurance underwriting businesses for a little over $3 billion, produced quite a substantial portfolio change in terms of capital. [In April 2008, Aon sold Combined Insurance and Sterling Insurance to ACE and Munich Re, respectively.]
Two other big uses of capital have been pensions and restructuring. We’ve got an underfunded pension plan that we continue to fund along minimum regulatory requirements. In terms of restructuring, we’ve done substantial operational-efficiency improvements in the business through more than 400 acquisitions over the last 20 years. As we integrate them, it really requires a serious investment to run the firm in a globally efficient manner.