Back when Eliot Spitzer was still New York's attorney general, one of his acts as was to sue Marsh & McLennan (NYSE:MMC) for sending its clients to insurance companies from whom it received contingency commissions.

In essence, Marsh & McLennan was neglecting its duty as an insurance broker for its own financial gain. In February 2005, it settled the civil suit to the tune of $850 million, paid over four years to clients of the company affected by these actions. As part of the settlement, it agreed to end the practice of accepting contingent commissions. This simple pact put the brakes on insurance merger and acquisition work for the next three years. That was until a couple of days ago. (For more of Wall Street's corrupt dealings that Spitzer prosecuted, read Eliot Spitzer - Man Of A Thousand Scandals.)

Willis Group Breaks The Dam
On Sunday June 8, Willis Group Holdings (NYSE:WSH) announced that it was buying North American rival Hilb Rogal & Hobbs (NYSE:HRH) for $2.1 billion. It's the biggest acquisition in the insurance business in almost 10 years. Large buyouts have been difficult to undertake due to contingent commissions collected by smaller companies.

In agreements reached with state attorneys general, companies like Willis Group, Marsh & McLennan and Aon Corp. (NYSE:AOC) were discouraged from accepting this type of commission, often thought of as a kickback for placing business with a certain insurance company. The Willis purchase happened as a result of an agreement with the state of New York that allows companies to buy intermediaries that still accept these payments with the understanding they stop doing so within three years. HRH still collects $40 million annually in contingency commissions. (Lawsuits can be damaging to a business, and its shareholders. Read our article Protect Your Company From Lawsuits to learn how to protect yourself.)

Lets Get Down To Brass Tacks
In terms of revenue, the acquisition doubles its North American business to $1.5 billion, generating total revenues in excess of $3.4 billion and adding $800 million to the company's top line. In the Q1 2008 earnings press release the company announced it expects adjusted EPS of $4.00 to $4.10 a share by the end of 2010.

Commenting on the acquisition, Standard & Poor's said it likes the deal, believing the purchase solidifies its North American business by adding depth to growth areas like personal lines. It also believes the deal will add between 7% and 14% annually to EPS, starting in 2009. Therefore, you're likely looking at EPS in 2010 closer to $4.50 and that's assuming Willis makes no further acquisitions. (For further reading on earnings, check out Assess Shareholder Wealth With EPS, and How To Evaluate The Quality Of EPS.)

Plumeri is a Man with Vision
Willis is paying a premium of almost 50%. Joe Plumeri, its colorful CEO, believes the purchase will transform the company. Looking at his track record, both in his current role as CEO and previously in the banking and brokerage industry, he's a leader who knows how to whip people into a frenzy. I was briefly (less than a year) involved with Primerica Financial in 1997 when he was CEO there and the man could sell like nobody's business. Very few can match his eloquence or his dapper attire.

Most importantly, few have the ability to motivate a sales force as he does. Just ask Henry Kravis of Kohlberg Kravis Roberts & Company, who hired him in October 2000 to run the insurance broker. At the time, Kravis said, "Joe Plumeri is without question the ideal leader for Willis."

Bottom Line
Joe Plumeri's been in the hot seat now for more than seven years, and while he does have his critics, I believe he's done an exceptionally good job. Since he's taken the reins, revenue and operating income have increased at compounded annual growth rates (CAGR) of 10.3% and 22.8% respectively. Since the IPO in June 2001, its stock has risen at a CAGR of 13.97%, which compares very favorably with a CAGR of 1.16% for the S&P 500. Willis currently sits No.3 behind Marsh & McLennan and Aon. Knowing Joe Plumeri, it won't be for very much longer.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center