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M&M RECLAIMS LEAD POSITION

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NEW YORK-The top of the insurance brokerage world is looking more than ever like the land of the giants.

Marsh & McLennan Cos. Inc. reinforced the point last week with its $1.8 billion takeover of Johnson & Higgins, a move that ends a decades-old rivalry and a long debate within J&H over whether it could survive as a privately held company.

The acquisition returns M&M to its customary spot as the world's largest retail broker, a position it ceded briefly after Aon Group Inc. absorbed Alexander & Alexander Services Inc. and Bain Hogg Group P.L.C. last year (BI, Dec. 16, 1996).

The combination makes M&M Cos. an all-around global behemoth with $5.3 billion in gross revenues, including Putnam Investment Corp.'s $1.1 billion. It will encompass the world's largest employee benefit consulting and captive management operations and possibly the largest reinsurance broker. J&H Marsh & McLennan Inc., which will be formed as the new brokerage unit of M&M Cos., will have gross revenues exceeding $2.3 billion.

For J&H executives, the takeover is also a stunning financial windfall: J&H's 51 shareholding directors and managing principals will reap large shares of the cash and M&M stock included in the deal. They also will keep a pool of J&H retained earnings and other cash estimated at more than $200 million.

Shares of the purchase price also will be spread among roughly 150 J&H principals, 45 retired J&H directors and about 600 handpicked J&H executives whose cuts of the deal will vest over periods of up to four years, confirmed J&H Chairman David A. Olsen and M&M Chairman A.J.C. Smith.

Mr. Smith and Mr. Olsen emphasize-and analysts agree-that the merger represents a good strategic fit both geographically and in the complementary specialty strengths each side brings to the table.

"There's very little grit and far, far more fit," Mr. Olsen commented.

The deal also caps a review of strategic options that J&H began almost a year ago, recognizing that the cash restraints of private ownership dimmed its prospects for growth, he added.

"Size is not a substitute for quality, but size is important and is becoming more so," Mr. Olsen observed.

M&M's acquisition push-which in January reeled in French broker Cie. Europeene de Courtage d'Assurance et de Reassurances, or CECAR-may not be over. Mr. Smith confirmed M&M is still talking with The St. Paul Cos. Inc. about acquiring Minet, but said that price is still a sticking point.

One unanswered question in the wake of the J&H acquisition is the fate of J&H's UNISON network of overseas correspondent brokers. The deal has jolted UNISON partners and other brokers now dwarfed by the top two (see story, page 66).

Overall, M&M and Aon in recent months have acquired four of the world's 20 largest brokers.

Risk managers, meanwhile, were generally positive about the M&M/J&H deal but said they would wait and see how well the integration progressed. Some also expressed concerns about the shrinking number of brokerage options.

"I worry about the day someone tries to do a broker competition and there's only one company out there," joked Sue Anne Mitro, manager-risk and insurance for The Hillman Co. in Pittsburgh.

In the deal announced last week, M&M will buy J&H for $600 million in cash and $1.2 billion in M&M stock. M&M will issue 11 million new shares as part of the deal and will cover the cash portion with bank financing and commercial paper.

Mr. Olsen confirmed that the $1.8 billion purchase price will be divided among several groups, including 24 active J&H directors and 27 managing principals, all of whom are shareholders; 45 retired directors, who receive yearly dividends from J&H through their 10th year of retirement; and 150 principals.

In addition, J&H has decided that roughly 600 key employees will also receive shares of the buyout proceeds, both as a reward for past performance and as an incentive to stay with the merged company. These awards will be vested over periods to be determined, but within a maximum of four years.

Sources familiar with the deal say a large part of the proceeds-perhaps as much as $600 million-may be set aside for the 600 or so key employees, though Mr. Olsen said no amount has been set.

Meanwhile, most of the 24 active directors are believed to have agreed to accept equal shares of the buyout proceeds even though the directors each hold differing amounts of J&H stock. Certain directors with larger holdings, though, are believed to have opted out of this agreement.

Mr. Olsen and other J&H officials declined to comment on how the money will be split among the directors and with other groups in the company. Joseph D. Roxe, a director and J&H chief financial officer, specifically declined to comment on whether most directors will receive equal shares.

"That's an internal matter that we are not going to review in the press," Mr. Roxe said.

While creating the world's dominant retail broker, the combined reinsurance revenues of M&M's Guy Carpenter & Co. Inc. and J&H's Willcox Inc. puts the merged company in a horse race with Aon Re Worldwide Inc. to be the world's largest reinsurance broker.

J&H, long a leader in captive management, will push J&H Marsh & McLennan far out in front in the captive field.

Meanwhile, A. Foster Higgins & Co. Inc., J&H's employee benefits consulting unit, will be merged with M&M's Mercer Consulting Group Inc., and the combination will represent the world's largest benefit consultant (see story, page 65).

Mr. Smith will be chairman and chief executive officer of J&H Marsh & McLennan, with four vice chairmen drawn from the two companies. The vice chairmen will be John T. Sinnott, president of M&M Inc.; Richard H. Blum, a director of M&M Cos.; Richard A. Nielsen, vice chairman and chief operating officer of J&H; and Norman Barham, J&H's president.

Messrs. Olsen, Nielsen and Barham are expected to become directors of parent M&M Cos., and Mr. Olsen will be named vice chairman of the parent company.

Mr. Olsen confirmed that he and Mr. Nielsen had planned to retire at the end of this year, but will stay on as long as the company requires them.

"I haven't bought an island in the Caribbean. I'll be in New York," Mr. Olsen joked.

The deal is expected to close during the second quarter and is subject to regulatory approvals and other closing conditions. It will not require M&M shareholder approval, an M&M spokeswoman said.

M&M's stock surged after last Wednesday's announcement, closing up $7 a share to $129. It dropped slightly to $128 at Friday's close.

The merger is the culmination of long soul-searching at J&H, whose top officials have repeatedly said the company was not for sale but who also saw it losing ground to consolidating rivals and hampered in its own acquisition plans by its status as a private company.

J&H started working with Morgan Stanley & Co. last spring to examine its strategic options, which included an initial public offering to finance an acquisition push, Mr. Olsen explained.

But "there are two parts to an IPO. The first is raising the funds and the second is deciding what you do with them," he noted. After considering an IPO-financed acquisition drive, "our feeling was that really wasn't something we wanted to do."

J&H began "exploratory conversations" with M&M in mid-1996, Mr. Smith said. The talks then went on "hiatus," but later resumed and led to last week's announcement.

Mr. Smith and Mr. Olsen emphasized the degree to which the two companies' operations mesh.

"Geographically, it's a remarkable fit," Mr. Smith said, noting for example that M&M has a strong United Kingdom operation while J&H is a relative newcomer since its split with former correspondent Willis Faber P.L.C. While M&M has a start-up operation in the Netherlands, J&H has a well developed company there.

The two brokers also complement each other in professional specialties, with J&H bringing strong expertise in health care, construction and technology industries while M&M has traditionally been stronger in marine and aviation, Mr. Smith observed.

In the United States, there is considerable geographical overlap: Both brokers have offices in about 40 of the same cities, while each has a dozen or more offices in cities where the other is not represented.

Mr. Smith said these operations are also complementary: "From place to place around the country, either we or J&H seems to have been more successful," he said.

The overlap will also create savings, though, as M&M combines offices and systems and cuts staff.

Mr. Smith estimated a $150 million reduction in the combined expenses to the two brokers. M&M reported expenses of $3.4 billion in 1996; J&H has not disclosed expenses.

Officials of the two companies said they have not focused on staff cuts yet and would not comment on how extensive they may be.

Revenue growth, not expense reduction, is the driving force behind the merger, brokerage officials emphasize: Mr. Smith predicted the combined companies may reach 25% year-to-year growth in retail brokerage revenues.

Analysts, and even some competitors, agree that the deal is a good move for both companies.

"Certainly there are a number of potential benefits from a merger like this," said John J. Kriz, managing director with Moody's Investors Service Inc. in New York. "Top-line growth is increasingly difficult in the commercial property/casualty business globally, and mergers have become one of the key ways to generate top-line growth."

"Furthermore, the nature of commercial lines brokerage is becoming more technologically intensive, with demand for broader product and service offerings by risk managers. It's becoming difficult to make a business proposition (work) without size," said Mr. Kriz.

"It was clear that J&H was going to find a partner," said John Wicher, a managing director for Russell Miller Inc. in San Francisco. The merger will create a "truly astounding professional practice."

The clout that the largest brokers wield with insurance companies should work even more to the benefit of clients of the merged J&H Marsh & McLennan, said Harris R. Chorney, national director of KPMG Peat Marwick's insurance practice.

"You have more leverage if you're producing 15% of (an insurer's) business than if you are producing 7%," he observed.

"I think overall these megaconsolidations will be very disruptive to the market and create a problem for major insurers because approximately 80% comes from these major firms," agreed Bernard Mizel, chairman and chief executive officer of USI Insurance Services Corp. in San Francisco. "At the end of the day it's going to change the complexion of distribution of insurance products in this country."

But "I think it's a great merger. It's a good fit. It's the most logical thing I've heard in a long time," he added.

"It's excellent. Basically what you have are two companies with really the same kind of market focus" on large corporate and international accounts, said Frank C. Witthun, president and CEO of Indianapolis-based Acordia Inc., which will become the world's fifth-largest retail broker.

"I think J&H has been looking to find a way that they can keep on doing what they do best," he said, calling the merger a "real natural."

Mr. Witthun said the merger is unlikely to have any great impact on either the way Acordia does business or on the possible sale of Acordia's property/casualty brokerage business by its parent, Anthem Insurance Cos. Inc. of Indianapolis (BI , Feb. 17; Feb. 10).

"Truthfully, in most cases we are not competing directly with Marsh & McLennan or J&H," said Mr. Witthun. Acordia focuses on midmarket accounts, he said.

Mergers like M&M/J&H and Aon/A&A by definition reduce risk

managers' choices in the marketplace, Russell's Mr. Wicher noted. The risk manager who always had "that implicit ability to say 'I'm going to call A&A or J&H or Marsh or Aon'," now faces fewer alternatives, he said.

But Patrick G. Ryan, chairman and CEO of Aon, says that consolidation actually will increase competition: "There is no end of competition. I think competition will be keener as a result of consolidation, because you have stronger organizations."

"We do believe that the forces that are in play are very real, and a very natural outcome of the competitive environment and low real growth in the business over the last 10 years" putting great financial pressures on companies, said Alan Levin, senior vp-insurance rating services at Standard & Poor's Corp. in New York.

For their part, risk managers sound enthusiastic about the merger but are waiting to see how it works out.

"I can see the complementary aspects of these deals, and the combined client base these two organizations have is going to be incredible," said Scott Lange, director of risk management for Microsoft Corp. of Redmond, Wash., a J&H client. "Provided the integration is done well, this is going to be an even more impressive organization and one that produces more benefits to its customers."

Millie Workman, risk manager for Mueller Industries Inc. in Memphis, Tenn.-who is actually an Aon client-also expressed concern about the impact of this or any similar merger on relationships.

"What if my team were basically wiped out and they said, 'Here's your new team.' I would not be a happy camper," she said.

J&H and M&M brokers were busy contacting clients last week to let them know the merger was coming.

"The reassurances were very, very nice, but we will just have to see what happens," said Hillman's Ms. Mitro, a J&H client.

Mark A. Hofmann contributed to this report.