Hewitt Change-of-control Plan Raises Eyebrows About Possible Sale

By Staff Report

Nov. 1, 2005

A recent Hewitt Associates filing has raised eyebrows about whether the company is contemplating a sale.

On October 7, the Lincolnshire, Illinois-based firm filed with the Securities and Exchange Commission to create a severance plan for its 24 top executives in the event of a change of control of the company. Under the plan, if these executives lose their jobs as a result of a merger or acquisition, they are each entitled to a lump-sum payment equal to two times their base pay and target annual incentive, among other things.

“What raised some questions about this is the timing,” says Bill Zinsmeister, an analyst at Piper Jaffray. Creating change-of-control severance plans is standard practice for public companies the size of Hewitt, but it’s curious that the firm waited until now to establish the plan, he says. Hewitt went public in 2002, opening it up as a possible takeover target.

Kelly Zitlow, a Hewitt spokeswoman, says the company is not considering a sale and that this provision is just standard procedure.

“We know that it is a best practice to put one in place,” she says. When asked why Hewitt didn’t create the plan when it went public three years ago, Zitlow says that management and the board of directors have been working together to prioritize post-IPO initiatives and this where the change-of-control severance plan fell.

It makes sense for Hewitt to prepare for the possibility of being acquired given that it has been a takeover target for years, analysts say. With all of the consolidation in the human resources consulting and outsourcing sector, many companies are looking at Hewitt as an ideal acquisition since it is the frontrunner in the market, says Michel Janssen, president of supplier solutions at the Everest Group.

“There is no doubt that they are a potential acquisition target, just like Exult was,” he says, referring to the outsourcing business that Hewitt itself acquired in October 2004. “But I don’t see any compelling events to make Hewitt’s management team do this.”

Janssen says that the company would have to miss its earnings estimates or lose a number of clients to spark serious acquisition talks.

Zinsmeister, however, says that given Hewitt’s suppressed stock market price, now could be a good time for acquisition discussions. The company’s stock was trading at a high of $35 per share early last year and now is around $26. “There could be an opportunity here,” he says. “It’s definitely cheaper to buy than to build.”

Jessica Marquez

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