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. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!