Company Name (Ticker)
Date
Overview of Company
MMC is a global professional services firm. The company extends into 4 major segments which provide clients with analysis, advice and transactional capabilities.
A) Risk Insurance Services (45% of Operating Revenue)
This segment provides risk management activities as well as insurance and reinsurance broking and services. Each business is compensated for brokerage and consulting services primarily through fees paid by clients and commissions paid out of premiums charged by insurance and reinsurance companies.
1) Marsh
Marsh Companies provide risk management, insurance broking, consulting and insurance program management services to a wide range of high net worth individuals, businesses, government entities and professional service organizations around the world. March’s Clients vary by size, industry, geography and risk exposure. A team assigned to a company will analyze and estimate risks that arise from client operations and assets. Such risks include: Property and liability risks, operating exposures (including employment practices), development and operation of technology resources, intellectual property, the remediation of environmental pollution, mergers and acquisitions, and political risks. Marsh then develops and implements hedging and other risk avoiding practices, such as: ergonomic workplace, safety programs, self insured programs, etc.
2) Guy Carpenter
Guy Carpenter offers its clients risk management modeling and advice. And they serve as an intermediary or broker between their client and a reinsurer.
B) Risk Consulting and Technology (Kroll) (8% of total Operating Revenue)
Kroll offers 4 basic products that are compensated in the form of fees paid my clients. These fees are hourly and not contingency based.
1) Business intelligence and Investigations
Includes information gather and analysis to help clients identify business risks and make informed decisions; conducting investigations to help clients to uncover wrongdoing,; litigation support; locating misappropriated assets; and managing programs to protect intellectual property, prevent money laundering and ensure the integrity of vendors. They also provide a full range of forensic accounting, litigation consulting, and valuation services to help clients uncover fraud, and assess financial damages for insurance claims and litigations.
2) Corporate Advisory and Restructuring Group
Kroll provides services with the objective of maximizing the value of financially troubled companies. These services include interim and crisis management, operational turnaround, strategic advisory, corporate finance, recovery and restructuring, and liquidation services.
3) The Security Group
This segment provides security to high net worth individuals, multinational corporations, government agencies, and architectural firms. Services include: security consulting, architectural security engineering, outsourced security operations and management, executive protection, intelligence and protective services, crisis and kidnap response, travel safety training programs, and training programs for executives, security professionals and military personnel.
4) Technology Services
Kroll offers data recovery with the help of electronic and paper-based discovery and computer forensics that help companies, law firms, and government agencies quickly and cost-effectively produce evidence. Further this segment also offers employee and vendor background investigations and identity theft services to a wide range of business and non-profit clients world-wide.
C) Consulting (35% of Operating Revenue)
Mercer Inc is the main subsidiary that MMC uses for its consulting segment. This segment is also paid on a fee basis.
1) Mercer human Resource Consulting
Mercer HR is the leading global provider of broad range of human resource (HR) advice and solutions. Mercer HR also provides related financial advice, products and services in the retirement and health and benefits area, as well as helping optimize human capitol with compensation programs.
2) Mercer Specialty Consulting
Special consulting offers advice in the areas of focused management, economic practices that assist corporate enterprises in the areas of strategy development, operational improvement, risk management, organizational and leadership development and regulatory economics and litigation support.
D) Investment Management (12% of 2006 Operating Revenue)
MMC conducts business in its Investment management segment through Putnam Investments Trust. Putnam offers a variety of products for the retail investor, including: open and closed end mutual funds, college savings plans, annuity products and offshore products. Putnam is compensated based on the 12b-1 fees on their funds, and on a fee basis for individual consulting. Putnam is being sold to Great West Lifeco. Inc, and will close mid 2007.
Industry
Marsh and McLennan can be divided into two main industries: The insurance side and the HR consulting side. First, insurance and reinsurance is concentrated in North America (54%). Europe makes up a 3 rd of total industry revenues (33.3%) and the rest of the world has a 12% share. 56% of the industry is controlled by the following 4 companies: Marsh and Mclennan (23%), Aon (22%), Willis Group (7%), and Arthur J. Gallagher & Co. (4%). Further, this industry is expected to grow at 6.5% for the next 4 years. Source: Datamonitor
The HR consulting industry is split evenly between the US (40%) and Europe (40%). The Asia Pacific region controls 15% while the rest of the world makes up 5% total. This industry is highly fragmented. The leading company in the industry controls only 6% of total industry revenues. Further, there are only 5 companies that contribute more than 1% of total industry revenues. This industry is expected to grow at 6.2% for the next 4 years.
Management
Michael G. Cherkasky President and CEO
Cherkasky has been the CEO since October 2004. Before its business combination with MMC in July 2004, Mr. Cherkasky was president and chief executive officer of Kroll Inc. Mr. Cherkasky joined Kroll in 1994, becoming president and chief executive officer in 2001. Prior to joining Kroll, Mr. Cherkasky spent 16 years in the criminal justice system, including serving as chief of the Investigations Division for the New York County District Attorney's Office.
Matthew B. Bartley CFO
Mr. Bartley was treasurer of MMC, a position he held since joining MMC in April 2001. Previously, Mr. Bartley was vice president of taxes at Engelhard Corporation, a multinational specialty chemicals and precious metals company, with responsibility for tax and transaction planning, execution and reporting. Prior to that role, he served for close to ten years in senior international treasury and tax positions at PepsiCo, Inc., where he was responsible for global strategic transaction planning and execution across international operating businesses.
M. Michele Burns Chairwoman and CEO of Mercer Human Resource
Prior to joining MMC, Ms. Burns was executive vice president and chief financial officer since May 2004, and chief restructuring officer since August 2004, of Mirant Corporation, an energy company. Prior to joining Mirant, she was executive vice president and chief financial officer of Delta Air Lines, Inc. from August 2000 to April 2004. She held various other positions in the finance and tax departments of Delta beginning in January 1999.
John Drzik President and CEO of Oliver Wyman Group (formerly Mercer Specialty Consulting)
Since June 2006. Mr. Drzik joined the former Oliver, Wyman & Company in 1984, became its president in 1995, and was appointed its chairman in 2000, a position he held until MMC acquired Oliver, Wyman & Company in 2003.
Simon Freakley President and CEO of Kroll Inc.
Since October 2004. Mr. Freakley started at Kroll in 1992 and was the CEO when it was merged with MMC.
Charles E. Haldeman Jr. President and CEO of Putnam Investments
Since November 2003. Mr. Haldeman joined Putnam in October 2002. Before joining Putnam, Mr. Haldeman was president and chief executive officer of Delaware Investments from 2000 to 2002, president and chief operating officer of United Asset Management Corporation from 1998 to 2000, and a partner and director of Cooke & Bieler, Inc. from 1974 to 1998.
David Spiller President and CEO of Guy Carpenter & Company, LLC
Since July 2006. Before joining Guy Carpenter, Mr. Spiller was chief executive officer of Benfield Ltd., the U.K. subsidiary of Benfield Group Limited, a reinsurance and risk intermediary, where he was responsible for all business and offices outside of the United States
Brian M. Storms Chairman and CEO of Marsh Inc
Since September 2005. Mr. Storms was president and chief executive officer of Mercer Human Resource Consulting, which he joined in August of 2004 as vice chairman. Prior to joining Mercer, he served as president since 2001 and then as chief executive officer since July 2002 of UBS Global Asset Management, Americas. Prior thereto, he was president of Mitchell Hutchins, the asset management subsidiary of Paine Webber.
Assessment of Capital Allocation/Growth Strategy
MMC is in a rebuilding stage presently. Revenues of the late 90’s and early 2000’s were very extremely high because of contingent commissions. Contingent commissions gave MMC and their brokers a higher commission on certain insurance plans. This meant that the interests of MMC and their clients were not aligned.
The New York attorney general sued MMC in 2004. MMC was forced to pay damages in excess of $1.7 billion. MMC was also forced to restructure and to discontinue their practice of contingent commissions, which was a large value driver for them.
Early this year MMC sold off it Putnam Investment group and a small part of their Kroll security group. Most other restructuring is in the Marsh risk management division.
Risks
Pending Litigation
There are no large suits outstainding at present, but several smaller suits presented against Marsh and its directors by stockholders and policyholders threaten to affect the stock price with bad publicity. These suits started in January of 2004 when the New York Attorney General accused Marsh of bid-rigging, and other fraudulent business practices. Following the announcement of the lawsuit the stock price dropped from $45 to $22.75. Further suits have the possibility of negatively affecting the stock price via EPS or bad publicity.
Sale of Putnam
MMC has agree to indemnify Great-West Lifeco for liabilities that may arise in connection with specified regulatory and litigation matters involving Putnam, including claims related to “excessive fees” or “Market-timing.” There are 5 suits in progress related to Putnam’s alleged use of Market-timing or “late trading.” At this point each suit has unspecified damages and has not yet quantified relief.
Marsh Business Model
MMC has changed Marsh’s business model. They will no longer offer market service agreements with insurers and they will now demand a higher commission and fee from their clients. For this increased fee they will provide other value adding risk advisory services beyond traditional brokerage activities. These changes are untested and if they are unsuccessful they will impede Marsh’s growth and thus 45% of MMC’s growth.
Global conditions
MMC is a worldwide business and as such they are susceptible to changes in political and economic conditions in foreign countries.
Valuation
P/E overstated because of the restructuring charges
Investment Rationale
There was a sharp drop in January of 2005 due to the announcement of the settlement with the NY Attorney General on the contingent commission suit. That drop is a reflection of a number of things:
· It reflects the large fun that MMC agreed to set up in order to reimburse their clients for any damages.
· The debt that MMC had to issue to cover this loss, the continued repayment of which is hurting their FCF
· MMC was forced to restructure and discontinue a lucrative practice that contributed a great deal to their bottom line.
· And The bad faith generated between Marsh (a brokerage firm) and its clients.
Valuation
<colgroup> </colgroup> | CAPM | CFO | 878 | Value based on Market Return |
| 10-yr | 5.11% | Cap Ex | (307.00) | | Base | Optimistic | Pessimistic |
| Beta | 0.95 | FCFF | 571 | Base | $ 30.53 | $ 33.10 | $ 17.82 |
| Mkt | 9% | | $ 1.03 | 6% | $135.69 | $ 150.21 | $ 51.23 |
| RR | 8.81% | FCFE | -160.0 | 8% | $ 41.70 | $ 45.50 | $ 23.15 |
| | $ (0.29) | 9% | $ 30.53 | $ 33.10 | $ 17.82 | ← Base |
| 10% | $ 24.06 | $ 25.92 | $ 14.40 |
| 12% | $ 16.98 | $ 18.11 | $ 10.32 |
| 14% | $ 13.24 | $ 14.00 | $ 8.02 |
| FCFE Projection |
| FCFE | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2016+ | Value |
| Best | NI grows at historical growth rates, as LTD is still being payed off | 2 dollars is a conservative estimate of FCFE from 1998 - 2003. 12% is the growth rate maintained in the same time period. Restructuring is sucessful. | Sustainable Growth Rate | Conservitive Long term | 9% Mkt Rtn |
| FCFE per share | $ (0.29) | $ 0.50 | $ 2.00 | $ 2.24 | $ 2.51 | $ 2.81 | $ 3.15 | $ 3.52 | $ 3.95 | $ 4.30 | $ 48.62 | |
| % Growth | 12.00% | 12.00% | 12.00% | 12.00% | 12.00% | 12.00% | 9.00% | 5.00% | |
| Discounted | $ (0.27) | $ 0.42 | $ 1.55 | $ 1.60 | $ 1.65 | $ 1.69 | $ 1.74 | $ 1.79 | $ 1.85 | $ 1.85 | $ 19.22 | $ 33.10 |
| | |
| Base | NI continues to grow and they are still paying off LTD | Restructuring is sucessful and they are able to grow at a similar rate as they have durring their contingent commission years. LTD in equilibrium. | Industry Growth Rate | Conservitive Long term | |
| FCFE per share | $ (0.29) | $ 0.50 | $ 2.00 | $ 2.24 | $ 2.49 | $ 2.74 | $ 3.01 | $ 3.31 | $ 3.64 | $ 3.86 | $ 43.60 | |
| % Growth | 12.00% | 11.00% | 10.00% | 10.00% | 10.00% | 10.00% | 6.00% | 5.00% | |
| Discounted | $ (0.27) | $ 0.42 | $ 1.55 | $ 1.60 | $ 1.63 | $ 1.65 | $ 1.67 | $ 1.68 | $ 1.70 | $ 1.66 | $ 17.23 | $ 30.53 |
| | |
| Worst | Takes Longer than expected to pay off LTD and NI doesn’t grow as rapidly. | Restructuring is sucessful, but revenues are not as strong as they were in early 2000's because of the absense of contingent commissions. | Long term Growth | |
| FCFE per share | $ (0.29) | $ (0.10) | $ 0.10 | $ 1.70 | $ 1.87 | $ 2.04 | $ 2.22 | $ 2.38 | $ 2.54 | $ 2.72 | $ 24.36 | |
| % Growth | 10.00% | 9.00% | 9.00% | 7.00% | 7.00% | 7.00% | 4.00% | |
| Discounted | $ (0.27) | $ (0.08) | $ 0.08 | $ 1.21 | $ 1.23 | $ 1.23 | $ 1.23 | $ 1.21 | $ 1.19 | $ 1.17 | $ 9.63 | $ 17.82 | . |
Sources
Bloomberg
Yahoo Finance
Morningstar
Datamonitor
MMC web site and SEC filings
$29.85 (07/25/07)
