NEW YORK--Marsh & McLennan Cos. Inc.'s decision to oust Marsh Inc. Chairman and Chief Executive Officer Brian Storms drew mixed responses from analysts, many of whom note that Marsh still faces operational challenges and questions about its long-term future.

MMC attributed the leadership change to poor execution of Marsh's long-term strategy. The move is the latest in a string of management changes at New York-based MMC following then-New York Attorney General Eliot Spitzer's 2004 fraud and bid-rigging lawsuit against the company and the resulting $850 million settlement. Under that pact, Marsh, like many of its competitors, had to cease collecting contingent commissions, which had been a source of hundreds of millions in revenues.

Although MMC has instituted various business reforms and restructuring efforts to aid in its recovery efforts, it continues to report mixed financial results and to lose staff and market share, analysts say.

These events, coupled with Mr. Storms' departure, caused some analysts last week to describe MMC as an attractive takeover candidate, while others say MMC's management should consider breaking the firm apart, unlocking additional value at such consulting units as Kroll Inc., Mercer L.L.C. and Oliver Wyman Group.

"I remain confident about the future of Marsh and MMC," Michael G. Cherkasky, MMC's president and CEO, said in a statement. "Insurance broking is at the heart of Marsh and always will be. Our people, services and clients have made us the leading insurance broker in the world," he said.

But just how long Mr. Cherkasky--who is taking over Mr. Storms' responsibilities until a successor is named--will be at the helm of MMC was one of several questions raised by analysts last week following Mr. Storms' departure.

"I think Brian Storms' departure was absolutely necessary; he made strategic mistakes that hurt Marsh's franchise from the first day he joined the firm," said Mark Lane, a principal and research analyst with William Blair & Co. in Chicago.

"He had no experience within the insurance brokerage industry, and it showed from the very start." In particular, Mr. Lane noted Marsh's "failed" attempt to increase commissions and fees to clients to make up for the lost contingents and its reorganization of U.S. business based on segmentation and geography.

"There is tremendous pressure on Mike Cherkasky, and if dramatic improvement is not seen in the near term, then I wouldn't be surprised to see a change at that level," Mr. Lane said.

"While we agree that Marsh management was not delivering, we believe any changes within the management structure must have accountability for MMC CEO Mike Cherkasky's performance," analysts in the equity research division of Citigroup Global Markets wrote in a report last week. "We believe Mr. Cherkasky did an outstanding job brokering an agreement with (Mr.) Spitzer regarding Marsh's bid-rigging allegations. Since then, by our measures, his record has underperformed his competitors."

Not every analyst was critical of Mr. Storms work at Marsh, though.

Bill Bergman, an analyst with Moringstar in Chicago, said he was a "bit surprised" by Mr. Storms' departure and that he "had a positive impression of his leadership ability."

In addition, New York-based Goldman, Sachs & Co. said in a note that it views the change "as a negative for the company. Over the past two years, Mr. Storms oversaw the rebuilding of the Marsh franchise following the Spitzer investigations.... Although the company has yet to fully recover from the fallout following these investigations, Mr. Storms appeared to have provided much needed direction for this unit."

In a statement announcing Mr. Storms' immediate departure, Mr. Cherkasky said that although Mr. Storms had made "important contributions" to Marsh's recovery over the last two years, "we now need different leadership and operational skills to complete the successful transformation of Marsh."

Mr. Storms, who joined MMC in 2004 from UBS Global Asset Management, became CEO of the brokerage unit in September 2005 after serving as president and CEO of Mercer.

An MMC spokeswoman said that while Messrs. Cherkasky and Storms agreed that the long-term strategy of Marsh called for the insurance brokerage to be the unit's core business--with risk advisory services a secondary enhancement to such services--the execution of that strategy had not gone as expected. "And that was evident in the financial results of Marsh in the past couple of quarters," she said.

Some observers, though, say that Mr. Storms' departure also was at least tangentially connected to the brokerage's recent near loss of Timothy J. Mahoney, Marsh's CEO of the Americas. Mr. Mahoney, who last month resigned to join Integro Ltd. as an executive vp, shortly after decided to remain with Marsh (BI, Sept. 17).

Although Marsh was successful in luring Mr. Mahoney back with a multimillion, three-year counteroffer, sources say the issue was ultimately the last straw for Mr. Storms.

Neither a spokeswoman for MMC nor Mr. Mahoney would comment about the matter. A source close to the situation, however, said there "is absolutely no connection" between the timing of Mr. Mahoney's decision to return to Marsh and Mr. Storms' departure.

While the reasons behind Mr. Mahoney's resignation have not been divulged, his responsibilities appear to have been reassigned in late July with the appointment of Mark Feuer to the additional post of CEO of its U.S. business, with responsibility for day-to-day operations. Mr. Feuer joined Marsh from Merrill Lynch in late 2006 to grow its middle-market business.

Mr. Feuer in his role reports to Mr. Mahoney, who oversees Marsh's business in the United States, Latin America and Canada.

"When firms bring noninsurance people in to run insurance operations, there is often this underlying tension that the noninsurance people think they're smarter than insurance people, and what ends up happening is...they start bringing in more noninsurance people," said a former Marsh executive who asked not to be identified. "I think what happened was Storms was alienating" some of the remaining senior executives who understand the insurance industry at Marsh, Mr. Mahoney being one of them. And "certainly, if you're going to recover from the problems Marsh went through, you need people who can connect with clients and markets, because that's what being a broker is."

Future unclear

Given Marsh's continued struggles and the management changes, analysts last week were once again speculating about the future of the firm.

"We no longer have confidence that MMC will be resurgent anytime soon," analysts at Morgan Stanley & Co. Inc. wrote in a report. "In a relationship business, we are concerned the breadth and depth of personnel changes at MMC will intensify and perhaps even become self-perpetuating, at least for a time."

The Morgan Stanley analysts note that a leveraged buyout of MMC is possible if capital markets conditions are conducive. But while such a transaction "could help the stock find a floor in the near to medium term," there are risks associated with it, namely further disruption of personnel.

"The continued problems and uncertainty at the brokerage division, coupled with the recent credit crunch, which makes an LBO unlikely, leads us to believe that management should reconsider breaking up the company, particularly given the recent strong results at the consulting division," David Small, a Bear Stearns analyst said in a research note.

"In our view, this organization is an attractive takeover candidate with its underperforming, but still formidable brokerage unit and best-in-class consulting arm of Mercer," Citigroup's analysts wrote in their report.

"Marsh's franchise is still very strong and it still has very valuable assets," Mr. Lane said. "Selling off the pieces does not make very much sense because the issue is execution and not strategic position, in our opinion. A large LBO is unlikely in the current credit environment, but everything has a price."

Rumors of MMC being a target of a leveraged buyout began to swirl last year after news that Willis Group Holdings Ltd., together with Kohlberg Kravis Roberts & Co., proposed to buy the much larger MMC (BI, Oct. 23, 2006).

A spokeswoman for Willis declined to comment as to whether the brokerage was interested in making another acquisition attempt.

Marsh shares closed Friday at $24.83, down from last Friday's closing price--the last day of trading before the change was announced--of $26.18.

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