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MMC considering spinoff of asset management unit


NEW YORK—Marsh & McLennan Cos. Inc.'s possible sale or spin off of its Putnam Investments subsidiary would enable the company to focus more clearly on its insurance brokerage and consulting business, but will likely have little direct impact on the remaining operating units, observers say.

The Boston-based investment management company does not complement the brokerage and consulting units, and Putnam's regulatory and legal problems over the past several years have been an added burden for the parent company, they say.

Due to tax considerations, however, any disposal of Putnam, which could be valued at several billion dollars, would likely not lead to a large cash infusion into MMC that would directly benefit its other operations, observers said.

In a reversal of its previously-stated position, Marsh said last week that it was exploring possible alternatives for Putnam.

MMC President and Chief Executive Officer Michael G. Cherkasky said in a statement that there have been "repeated inquiries" over the past few months from interested parties wanting to either partner with or acquire Putnam.

"Therefore, in consultation with MMC's board, I decided it was in the interest of our shareholders to do a market check to determine the value others would put on Putnam," he said.

Mr. Cherkasky said the process has just begun and the company has not decided whether to take any specific actions.

Observers say possible options include a sale or spin off of the operation.

The impact on insurance buyers would be "somewhere between neutral and slightly positive," said John L. Ward, chief executive officer of Cincinnati-based Cincinnatus Partners L.L.C., an advisory firm that specializes in the insurance industry.

Putnam "has never been a logical operation for Marsh to own. They are very different markets," said Mr. Ward.

There is not much synergy between Putnam and Marsh "and right now--with all the other problems Marsh is dealing with, and has dealt with over the last several years--as problems continue to mount in the Putnam operation, this divestiture will enable Marsh to really focus on its core business, and I think that will ultimately benefit the risk management community," said Mr. Ward.

Putnam, which had $181 billion in assets as of the end of August, generated $140 million in operating income for the first half of 2006, compared with the $407 million posted by MMC's risk and insurance services segment, and the $237 million reported by its human resource consulting and specialty consulting businesses, according to filings with the Securities and Exchange Commission.

Regulatory and legal issues

SEC filings describe a host of regulatory and legal issues related to Putnam. For instance, in 2003 and 2004 Putnam entered into agreements with the SEC and state authorities in Massachusetts regarding excessive short-term trading by former Putnam employees in Putnam mutual fund shares. Under these agreements, Putnam paid a total of $110 million in restitution and civil fines and penalties. Short-term trading refers to frequent trading in and out of positions.

Furthermore, MMC and Putnam have received complaints in more than 70 civil actions based on allegations of market timing and, in some cases, late trading activities. Late trading occurs when a purchaser places a post-closing order and buys at that day's net asset value, thus unlawfully receiving a benefit other investors are denied. Market timing can involve illegal, short-term transactions.

Observers say there is little if any connection between Putnam and MMC's other operations, which include insurance brokerage Marsh Inc., reinsurance intermediary Guy Carpenter & Co. Inc. and Mercer Human Resource Consulting.

"I think for the typical Marsh risk management client it's a nonissue," said Timothy J. Cunningham, a principal with insurance brokerage adviser OPTIS Partners L.L.C. in Chicago.

Observers say disposing of the Putnam operation is a logical move. MMC is seeking to focus on its core competency, which is insurance distribution and its Mercer unit, said Robert J. Lieblein, president and chief executive officer of Harrisburg, Pa.-based WFG Capital Advisors, an investment banking and financial advisory firm that specializes in the insurance industry.

"My first question would be, 'what took them so long?"' said John Wicher, of San Francisco-based John Wicher & Associates Inc., which provides consulting and investment banking advisory services to the insurance industry.

Putnam was "an outlier on the screen. It wasn't a strategic priority." Disposing of it would result in a "smarter, better-focused Marsh" and a "crisper story" of who they are, said Mr. Wicher.

Putnam's performance has been lackluster in recent years and its contribution to MMC's earnings has diminished, said Greg Dickerson, New York-based associate director for Fitch Ratings.

Any move is unlikely to lead to a capital infusion that would directly benefit MMC's other operations, said Mr. Ward, who estimates the value of a Putnam deal could exceed more than $5 billion.

A deal is likely to be structured as a noncash transaction "which would involve more of a securities exchange" because MMC would be charged at a 40% tax rate for any cash it receives, he said.

MMC's stock closed at $28.35 on Friday, up $2.38 from a week ago.