Getting Marsh Out Of The Swamp
Michael G. Cherkasky, the scrappy prosecutor-turned-corporate chief at Marsh & McLennan Cos. (MMC ) (MMC), is savoring a moment of sweet vindication. For much of the past two years he has been slammed as an insurance industry naïf and a novice chief executive out of his depth at the troubled $12 billion-a-year company. He has been pressed to sell MMC to buyout firm Kohlberg Kravis Roberts & Co. He was even ridiculed by CNBC's Jim Cramer, who put him in Mad Money's "hall of shame" in August after a disappointing quarter, arguing that Cherkasky's departure would drive up MMC's stock 25%, to 32.
So the healthy quarterly gains Cherkasky announced on Nov. 1, showing that net income more than doubled, at last gave him something to brag about. "The initiatives we have talked about over the last year are working," crows Cherkasky. Recently MMC's share price topped 31, right about where Cramer said it would be if the CEO stepped down.
But Cherkasky shouldn't gloat. There has never been a doubt that the accomplished lawyer, who prosecuted murderers and investigated terrorists for the Manhattan District Attorney's office, rescued MMC from certain ruin last year at the hands of New York Attorney General Eliot Spitzer, a longtime pal. He staved off an indictment for bid-rigging by reaching an $850 million settlement with Spitzer and making tough efforts to clean house. Cherkasky must now, however, breathe life into the hodgepodge of companies that form MMC, developing synergies among the corporate insurance brokers at Marsh, the human resource consultants at Mercer, and the corporate sleuths at Kroll.
He insists the outfits are better together, even though their only apparent common denominator is that they serve many of the same companies. Forging the links "is something that has taken longer" than anyone expected, he concedes.
Cherkasky's few years in the corner office, first at Kroll and then at the much larger MMC, have amounted to a bruising education. Life as a CEO, he says, is far different from anything he has done before. As a lawyer, corporate monitor, or a consultant--all of which he has been, at various times--"you give advice and you go home," he says. "As the person who actually has to do it, you stay up at night worrying about whether you've gotten it right."
When Cherkasky got the top job in late 2004, he had been at the company just a few months, having come aboard when MMC acquired Kroll in the middle of that year. Investors at first hailed him as a savior but then soured on him as results sank over several quarters. MMC'S stock fell from nearly 55 a share in 2003 to a low of 24 last August.
Cherkasky, 56, blames much of the slide on the difficulty of righting a ship whose 55,000 employees worldwide are clinging to old ways of doing business. He compares his efforts to fix MMC with his work as a court-appointed monitor for the Los Angeles Police Dept., which he has overseen since 2000, when the federal government found that the LAPD routinely violated citizens' constitutional rights. At both MMC and the LAPD, he says, huge numbers of 20- and 30-year staffers simply "hold their breath for five years," hoping to outlast change-minded bosses instead of changing their ways.
But some of the moves Cherkasky engineered are paying off, especially in the past quarter. Fewer clients and staffers are defecting to rivals. For instance, Cedar Fair (FUN ) Entertainment Co., a $1 billion Sandusky (Ohio) theme-park owner, quit Marsh in early 2005 as an insurance brokerage client to try rival Aon. But last spring it returned. Cedar Fair Chief Financial Officer Peter J. Crage mostly credits Marsh's expertise in insuring park, hotel, and marina properties, but says a phone call Cherkasky made to Cedar Fair in early 2005 didn't hurt. "He was setting the right tone and moving in the right direction. That was reassuring to us," Crage says.
Cost-cutting has also helped MMC. Cherkasky trimmed some 5,750 jobs in three rounds of restructuring, boosting efficiencies. Such cuts, he says, were needed to make MMC as nimble as the upstarts that are giving it fits. And yet he knows keeping morale up is daunting, especially when Wall Street shows far less patience than even the crustiest of judges. "If you see some more bleeding of employees and morale doesn't significantly improve, you're never going to see the revenues come back," warns UBS (UBS ) Securities analyst Brian R. Meredith.
Notwithstanding the shakeup, Cherkasky complains that MMC staffers still resist efforts to cooperate with employees from other divisions. That has set back his moves to boost revenues by cross-selling services. He talks up examples of synergies, such as a global media client that uses Marsh to manage its insurance needs and recently tapped Mercer for advice on health coverage. "I don't want there to be divisions in Marsh or divisions between Marsh and Mercer," he says. But he frets that the culture change needed for staffers to see value in such strategies can't happen "in a week or a month or a year."
While midwifing the slow culture shift, Cherkasky must generate results fast to please shareholders.They'll have reason to cheer if he sells or spins off the Putnam mutual fund operation, tarnished by the trading-abuse allegations of 2003 involving market timing. Although mum on his exact plans for Putnam, he is weighing offers from prospective buyers even while tax reasons may make a spin-off to shareholders more appealing. The outfit doesn't fit with the other MMC units, he says, but he figures he'll get top dollar only when it reverses outflows of investor money.
Cherkasky, who plans to spell out more of his plans for shareholders at a Dec. 7 investor day, could report more progress on brokerage revenues. He managed to stanch the losses by clocking in with flat revenues in the third quarter, an improvement over nearly two years of steady declines.
Marsh is battling a trend of larger firms losing business to upstarts. Integro Insurance Brokers has swiftly grown into a $50- million-a-year outfit by wooing such longstanding Marsh clients as Sun Microsystems (SUNW ), Stanley Works (SWK ), Praxair (PX ), and PIMCO (AZ ), industry sources say. Integro was founded in early 2005 by former Marsh president and 32-year company veteran Roger E. Egan, who says it's "doubly exciting" for him to compete against his old outfit, along with rivals Aon and Willis (WSH ). With such competitors on the rise, Marsh's brokerage revenues from U.S.-based customers slipped 7% in 2005, to $5.2 billion, while No. 2 Aon (AOC ) suffered a 9% slide, to $2.7 billion, according to industry watcher Business Insurance. Fourth-ranked Willis Group Holdings saw a 2% rise last year, to just over $1 billion.
One thing Cherkasky is pointedly cool on is selling out to KKR and Willis. He insists MMC can do better for shareholders on its own. Sources close to the matter say KKR would like to merge Marsh and Willis, putting the smaller firm's managers in charge. KKR took then-struggling Willis private in a 1998 leveraged buyout and afterward reaped a $2.6 billion gain on its $305 million investment by taking Willis public again in 2001.
None of the parties would talk publicly about the KKR-Willis plans. But Willis CEO Joseph J. Plumeri is keeping the pressure on MMC's board. As recently as Oct. 26, Plumeri expressed interest in a "transformational" deal that would reshape his outfit. If KKR and Willis could come in with a rich price--one that intrigues even shareholders who bought in at 55--MMC's board would certainly pay attention. Of course, every quarterly improvement Cherkasky shows could make the price even more steep.
The CEO, whose contract with MMC lasts only until 2008, doesn't see himself as a lifer in the corner office. He'd eventually like to get back into public service or academia, but not because of the ups and downs he's been through with MMC. Those, he says, don't faze him. As a prosecutor, he got used to being reviled. "I've been called names my whole career." Still, one day he'd like to be called the guy who turned around MMC.
By Joseph Weber