After finding itself the subject of several recent investigations, Marsh & McLennan Cos. (MMC) is expanding its expertise in the area. The insurance and financial-services giant's $1.9 billion purchase of premier risk consultancy Kroll Inc. (KROL), announced on May 18, gives MMC a foothold in services ranging from forensic accounting to executive security. More important, perhaps, snapping up a company that's devoted to preserving corporate integrity may help beleaguered Marsh & McLennan regain some esteem on Wall Street. The stakes are especially high for MMC Chairman and Chief Executive Officer Jeffrey W. Greenberg, 52, who initiated the cash deal as various parts of his $11.6 billion empire have come under scrutiny from investors and regulators.
WIN-WIN. Certainly, the market's initial positive reaction to Greenberg's pricey bet is a welcome relief from the controversies that have plagued MMC's main businesses. Just as its Putnam Investments unit agreed to pay out $110 million in settlements in April over its trading practices in mutual funds, New York State Attorney General Eliot Spitzer started looking into potential conflicts of interest in the Marsh Inc. brokerage business. (In an illustration of the clubby world in which these players operate, Spitzer once worked with Kroll Chief Executive Michael G. Cherkasky in the New York County District Attorney's Office.) Cherkasky will run Marsh Inc.'s newly combined risk-consulting business while founder Jules B. Kroll, who has close ties to Greenberg and his father, American International Group (AIG) CEO Maurice R. Greenberg, will become a vice-chairman of Marsh.
Still, many view the deal as a win on all sides. Marsh & McLennan's stock began to rise on the news -- an unusual market reaction to acquisitions. It had been trading near its 52-week low. Analysts like the fact that Kroll is in a lucrative sector that complements several mature MMC businesses. "That's the one thing that Kroll is doing -- growing," says Standard & Poor's equity analyst Greg Simcik. "Marsh is having some trouble with that." Greenberg argued that Kroll "is a powerful strategic fit."
`DIFFERENT ROOMS'. The payoff for Kroll may be even better. In addition to getting a 32% premium on its shares at the time the deal was announced, the $485 million security outfit should get access to a much broader client base. MMC's Mercer Inc. consultancy is a powerhouse in the nation's human resources departments, where Kroll does background checks. MMC's brokerage places a major chunk of corporate insurance, an area in which Kroll already does post-incident reports. "We live in the same house of a client, but we have been occupying different rooms," says Kroll, who launched the company in 1972 and netted $110 million for his stake. While he wasn't looking to sell, Kroll adds, extending his concept of risk management into these areas "is the fulfillment of a lifetime dream."
Of course, aligning one's fortunes with a company embroiled in scandal can quickly become a nightmare. That's especially true at Kroll, which bases its entire identity on upholding integrity and security while ferreting out wrongdoing. Among other things, it's known for tracking down the assets of dictators such as Haiti's Jean-Claude "Baby Doc" Duvalier and Iraq's Saddam Hussein.
Cherkasky admits that MMC's woes came up in conversation when the deal was proposed. "We're a due diligence company," he says. "But this is also a company that looks past the headlines." In his view, MMC's history, brand strength, and professionalism outweigh the scandals weighing it down. Then again, observers note that Kroll has been beefing up fund manager background checks and was hired to do forensics on the kind of market-timing practices that got Putnam into trouble. The true value of this marriage is perhaps yet to be seen. By Diane Brady, with Mara Der Hovanesian, in New York