Marsh & McLennan Agency deal to be 1st of many, CEO says

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Related Companies Goldman Sachs Group Inc. (GS) GS Capital Partners LP Insurance Alliance Marsh & McLennan Agency Marsh & McLennan Cos. (MMC) USI Holdings Corp.

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Related Deals Goldman Sachs Group, Inc./USI Holdings Corporation Marsh & McLennan Companies, Inc./Insurance Alliance

Marsh & McLennan Cos. Inc.'s Nov. 12 announcement of its acquisition of Houston-based Insurance Alliance carries considerably more significance for the insurance broker than the mere $15 million in annual revenues produced by the target would otherwise imply. As the first acquisition for Marsh & McLennan Agency LLC, coming more than 12 months after the middle-market brokerage venture was launched, unit Chairman and CEO David Eslick told SNL that the company is building momentum toward its goal of something on the order of 100 such transactions during the next five years.

"The market was expecting that you set up a company, put people in place, and you start doing deals," conceded Eslick, the former USI Holdings Corp. chief who was named to his current position in January. He spent a decade at Briarcliff Manor, N.Y.-based USI, serving as chairman, president and CEO from 2002 through November 2007, months after the company was taken private by Goldman Sachs Group Inc.'s GS Capital Partners LP.

Although the 12-month anniversary of Marsh & McLennan Agency came and went without any acquisitions having been announced, Marsh & McLennan CEO Brian Duperreault saw to it during his company's third-quarter earnings conference call that the agency division did not fall out of sight and out of mind.

"As we approach year-end, we are likely to announce several acquisitions, which will allow Marsh & McLennan Agency to operate in select geographic areas across the United States," Duperreault said as part of extended prepared remarks about his company's acquisition strategy.

Eslick, a 30-year veteran of the brokerage space with more than 50 acquisitions to his credit at USI, said Marsh & McLennan Agency "could have done 20 transactions by now" had the company not pursued the disciplined and targeted approach to growth that it has thus far employed.

"We've been taking our time to make sure we're disciplined," Eslick said. As Duperreault explained on the Nov. 4 conference call, Marsh & McLennan Agency has established requirements with respect to targets' quality, cultural compatibility and business approach.

The idea, according to Eslick, is to "not just rush ahead to do things just to say we've done things." The company has been especially focused on identifying what Eslick described as "the partners we think are right to lead from foundation standpoint" for the hub-and-spoke system that Marsh & McLennan Agency plans to employ across 10 different geographic regions.

Although there is no particular significance in Insurance Alliance being the first Marsh & McLennan Agency deal to be announced, the target is an ideal fit for what the company is seeking in prospective foundation agencies. Described as one of the largest independent agencies in Texas, Insurance Alliance serves more than 1,500 commercial clients in the Lone Star State and throughout the Southwest. Eslick described Insurance Alliance as a quality operation with a great client base and key carrier relationships. The company also maintains what he characterized as a nice mix of commercial lines, personal lines and employee benefits. Also noteworthy was the news that Insurance Alliance Chairman Woody Woodard would serve as CEO of Marsh & McLennan Agency's new Southwest operation, with Insurance Alliance executives Jim Berger serving as COO and Jim Tomforde serving as vice president of sales for the region.

The team represents "really strong leadership talent that can be levered to manage and oversee a much bigger platform," Eslick said. He emphasized that Marsh & McLennan Agency is not interested in acquiring companies where the principals see M&A as an exit strategy.

"We need and want the leadership talent to stay on," he said. At the same time, joining Marsh & McLennan Agency offers a way for agencies and their executives to enhance their business position while providing clarity around perpetuation and succession, two of the more critical dilemmas in a business where the average agency owner is in his or her late 50s.

Once Marsh & McLennan Agency acquires a foundation agency like Insurance Alliance in a given geographic region, it can then "get aggressive" about fold-in or spoke acquisitions in that area, Eslick said. He reiterated Duperreault's recent optimism on the depth of Marsh & McLennan Agency's deal pipeline, and he confirmed that the company will make more acquisition announcements before the end of the year, which in turn will allow the company to gain significant momentum.

When Eslick spoke Nov. 9 at the SNL Insurance Brokerage Summit in New York, he joked, "I can't believe I'm at Marsh." But while skeptics outside of the company continue to question the brokerage giant's commitment to the smaller end of the marketplace and the willingness of some sellers to join up with such a large entity, Eslick said his mere presence at Marsh & McLennan Agency should help to confirm his statement that Marsh is "doing it very differently" in its latest foray into the business.

Marsh & McLennan Agency maintains autonomy from its parent through the separate company structure and its own board. The company maintains an entrepreneurial focus consistent with that held by many of the agency owners it is seeking to acquire. At the same time, it enjoys access to the significant amounts of capital and broad platform maintained by what Eslick referred to as the "mother ship."

Marsh is "as good a capital partner as you can imagine," Eslick said, and the start-up nature of Marsh & McLennan Agency allows acquisition targets to get in on the ground floor of what he predicted is a business that will "be around for a very long time."

The company's entry into M&A comes as many industry participants expect the number of prospective sellers to increase in 2010. Deal activity to date in 2009 has declined markedly from prior years, a function of the combination of fallout from the global financial crisis and a wide gap between bid and ask prices.

Eslick declined to provide a deal value or to discuss the price paid for Insurance Alliance relative to the target's EBITDA, the primary financial measure for agency acquisitions. But, he said: "We are very fair players in the marketplace. We pay fair prices, and we expect to get a decent return for our shareholders."