1997 EMPLOYEE BENEFITS: BENEFIT CONSULTANTS JUMP ON CONSOLIDATION BANDWAGONPosted On: Dec. 21, 1997 12:00 AM CST
The urge to merge and acquire, which has swept across industry after industry, hit the employee benefit consulting business in 1997.
During the first three months of the year, six of the 10 largest benefit consulting firms initiated or completed major mergers or acquisitions.
Those transactions included:
Buck Consultants Inc.'s purchase by Mellon Bank Corp., one of the nation's top 25 banks.
Coopers & Lybrand L.L.P.'s acquisition of Kwasha Lipton L.L.C.
Aon Consulting's absorption of The Alexander Consulting Group.
William M. Mercer Cos. Inc. absorption of A. Foster Higgins & Co. Inc.
To be sure, the Aon-Alexander and Mercer-Foster Higgins' linkups were driven by the consultants' parents -- Aon Corp. and Marsh & McLennan Cos. Inc., respectively -- to cut brokerage costs and expand revenues.
But trends sweeping the employee benefits consulting business very much drove the purchases of Buck Consultants and Kwasha Lipton.
In the case of Buck, an 80-year-old New York based-firm that had been owned by employees, client demands for outsourcing services were a key factor behind selling to Mellon.
Mellon is a huge financial services company. Buck executives reasoned that with Mellon as its parent, Buck would be able to draw upon far more resources to make the massive technological investments necessary to become an outsourcing powerhouse.
Indeed, at the time of the purchase, Buck President and CEO Joseph LoCicero said Buck might not be able to succeed in the outsourcing field without Mellon's assistance.
Now, nearly a year after the purchase was announced, Mr. LoCicero says growth in outsourcing has been substantial. In all, Buck, the world's eighth-largest benefit consulting firm, estimates benefit consulting revenues climbed 26.4% from 1996 revenues to $302 million in 1997. A good chunk of that growth, though, came from Buck's purchase in late 1996 of WF Corroon, the benefit consulting unit of Willis Corroon Group P.L.C., the U.K.-based insurance broker. WF Corroon had 1995 revenues of about $50 million.
The situation was somewhat different for Fort Lee, N.J.-based Kwasha Lipton. Kwasha Lipton has been known for its creativity -- it came up with, for example, the innovative cash balance pension plan concept -- and its success in winning the benefit consulting business of Fortune 500 companies.
Yet, when Kwasha Lipton executives looked at what the future might hold for the company, they were concerned. While the consultant was not losing existing business, potential clients were passing up Kwasha Lipton because they questioned the firm's staying power. With just $79 million in 1996 revenues, Kwasha Lipton was dwarfed by the largest consultants, whose revenues were anywhere from seven to 10 times larger.
By linking up with Coopers & Lybrand, which at the time of the purchase was the sixth-largest benefit consultant and now is the fifth, Kwasha Lipton joined a firm with many practices and offices worldwide.
The combination has worked for both firms. Over the past eight months, "business has grown by leaps and bounds," said Robert Byrne Jr., managing principal of the Coopers & Lybrand unit known as The Kwasha Lipton Group.
Mergers and acquisitions also were a boon to clients, consulting firm executives and others say.
Mercer's acquisition of Foster Higgins gave Foster Higgins clients access to a depth and breadth of services that Foster Higgins could not match. Foster Higgins, for example, lacked a compensation consulting practice and was only a small player internationally. Mercer, by contrast, generates more than 40% of its revenues internationally and is one of the largest benefit consultants in the United Kingdom, Australia and New Zealand.
Still, while only a fraction of Mercer's size, Foster Higgins had some of the top consultants in the country and its annual survey of health care costs has no equal at any firm.
The Aon and Alexander consulting combination brought together two smaller firms -- Aon Consulting was the ninth-largest consultant in 1996 and Alexander Consulting Group the 10th largest -- to create the sixth-largest firm.
Still, from the client perspective, these mergers and acquisitions can have some drawbacks.
Inevitably, when benefit consulting firms merge, some consultants find they don't fit in well at the merged firms and leave. That can disrupt longstanding relationships employers have with their consultants.
Yet, employers say they aren't worried that the wave of mergers and acquisitions will reduce competition and ultimately increase costs.
Right now, benefit managers say there are enough consultants to choose from so that competition for employer contracts continues to be intense.