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Marsh reaps $3.9B with Putnam deal


NEW YORK—Marsh & McLennan Cos. Inc.'s sale of Putnam Investments, its investment management unit tarnished by trading scandals, will make the brokerage stronger and more focused, analysts say.

Great-West Lifeco Inc., a Winnipeg, Manitoba-based unit of Montreal-based Power Financial Corp., will purchase Boston-based Putnam in an all-cash $3.9 billion deal announced last week. The sale will enable New York-based MMC to pay down debt, repurchase stock, make acquisitions and focus on building its risk and insurance and consulting businesses, according to analysts.

The sale of Putnam also makes a buyout of MMC more attractive, analysts note, although they disagree as to the likelihood of such a deal.

At the end of 2006, Putnam, which MMC acquired in 1970, had $192 billion in mutual fund and institutional assets under management and generated $1.51 billion in revenues, about 13% of MMC's total revenues in 2005.

MMC has been under pressure, however, to shore up its operations following a host of regulatory and legal issues that have afflicted both Putnam and MMC's brokerage unit, Marsh Inc.

In 2003 and 2004, Putnam entered into agreements with the Securities and Exchange Commission and state authorities in Massachusetts regarding excessive short-term trading by former Putnam employees in Putnam mutual fund shares. Putnam paid a total of $110 million in restitution and civil fines and penalties.

In addition, MMC and Putnam also have received complaints in more than 70 civil actions based on allegations of market timing and, in some cases, late-trading activities, according to SEC filings.

Reversing its previously stated position, MMC said last September that it was exploring possible alternatives for Putnam, citing "repeated inquiries" from interested parties (BI, Sept. 25, 2006).

In a statement announcing the deal, Michael G. Cherkasky, MMC's president and chief executive officer, said the deal will strengthen the company's ability to focus on its core businesses and "significantly enhance" its financial flexibility.

"The proceeds to MMC from this sale, combined with our strong cash flow, will give us the flexibility to consider a number of desirable options to further strengthen our company, such as investing in our business, stock repurchases, and debt reduction," he said.

Analysts say that although Putnam provided good cash flow to MMC, it has struggled to rebound following the trading scandals. With the proceeds from the sale, MMC will be more able to focus on strengthening its brokerage operation, which has suffered from its own scandal--namely former-New York Attorney General Eliot Spitzer's fraud and bid-rigging suit and the resulting $850 million settlement.

"It was a good deal while they had it," said Gretchen Roetzer, a credit analyst with Fitch Ratings' insurance group in Chicago, referring to Putnam as a "cash cow" with a solid reputation and market respect during its heyday.

"It's just never recovered like they hoped it would, and I imagine it's just not worth the time and effort at this point" to continue working on turning it around, she said. "They need someone to come in there and put some time and effort and attention to that, and Marsh" needs to be concentrating on its brokerage business, she said.

"It's nice to see them announce a transaction that's been discussed for so long and get focused back on their core franchise," said Mark Lane, a research analyst with William Blair & Co. in Chicago.

"We think they will definitely use some (of the proceeds) to pay down debt and some to repurchase stock. We do expect them to be acquisitive; maybe not immediately, but within a reasonable period of time of the transaction closing," he said.

With Putnam no longer in the picture, analysts say MMC is a more attractive buyout option, but they have different opinions about whether that is likely to happen.

"There's a lot of private equity money out in the world and Marsh is struggling a bit in terms of lost market share," said Cliff Gallant, an analyst with Keefe, Bruyette & Woods Inc. in New York. "If they don't turn that around, I think the pressure grows on the board to do something. And if there is someone else out there who thinks they can pay a higher price on the stock price and squeeze some value out of the broker, at some point, the board has got to explore that option."

"By default, I would think, yes, (MMC) is more attractive because ...something else is gone that doesn't have to be fixed, but that doesn't mean (a buyout) is any more likely to happen," Fitch's Ms. Roetzer said.

Rumors of a buyout of MMC emerged last year following news that Willis Group Holdings Ltd. made an unsolicited, informal offer to acquire MMC over the summer (BI, Oct. 23, 2006).