What You Talkin' About Willis?

By Will Ashworth | June 08, 2008 AAA

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.

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