December 29, 2006
The news wires this morning are reporting that financial and business services firm Marsh & McLennan (NYSE: MMC ) is in the final stages of selling its Putnam investment management unit to Canadian investment firm Power Corp. If and when Putnam is sold, Marsh will be left with three business segments: Marsh and Guy Carpenter insurance broking, Mercer consulting, and Kroll risk consulting and technology. So, will the company be better off without Putnam?
The sales price being mentioned for Putnam is $3.9 billion, or 2% of assets under management, which is fair, but not much of a premium price tag. Marsh & McLennan's stock has struggled over the past several years, as the insurance and investment units were accused of dubious business practices. The mutual fund timing scandal exacerbated problems at Putnam and it has yet to recover; assets under management have fallen by over 50% since 2000 to a recent $191 billion.
The good news for Marsh Mac is that Putnam represents its most troubled unit and is undoubtedly acting as a drag on an overall growth rate that may have recently turned a corner. The sale proceeds could benefit current shareholders through additional share buybacks or debt reduction initiatives. The move may also allow management to refocus on reviving the flagship insurance services unit and better compete with Aon (NYSE: AOC ) , Brown & Brown (NYSE: BRO ) , and Willis Group Holdings (NYSE: WSH ) . A sale could even enhance flexibility by freeing up capital for spending initiatives or other potential acquisitions.
On the other hand, there is concern that the transaction represents a fire sale and Putnam is being sold during a time of weakness rather than strength. Time will tell if a recent increase in assets under management only represents a blip in a long-term downtrend. But could Marsh Mac have waited until conditions stabilized or improved in hopes of getting a better price later on? An outright sale will likely also result in a hefty tax bill, as Putnam was purchased back in the 1970s.
In any case, the Putnam saga looks to be ending soon for Marsh Mac. It won't be the most graceful exit, but it should allow the company to put its past struggles behind it once and for all.
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Fool contributor Ryan Fuhrmann is long shares of Marsh, but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.