Marsh McLennan (MMC) has endured two long ordeals and appears to be surviving both of them. First, an after-hours trading scandal and inferior investment performance combined to cause MMC's investment arm, Putnam Investments, to decline more than $200 billion in assets, starting 2000 with more than $390 billion under management and finishing 2005 with less than $190 billion. Second, Eliot Spitzer accused MMC of unethical practices, forcing new commission structures in its insurance brokerage division. As a result, MMC saw its brokerage margins move from 30% to less than 10%.
With these ordeals basically behind MMC, what lies ahead? Putnam Investments is still sizeable with $190 billion under management, arguably valued at nearly $6 billion by applying the multiples accorded other public traded mutual funds. This translates to about $11 per share, assuming the bleeding continues to be stanched.
The brokerage division is still powerful, sharing the title of largest in the world with AON. With the loss of contingent commissions, MMC's brokerage appears to be at reduced 14% operating margins, still giving an operating income of about $800 million. By applying a multiple of 10 times operating income, the brokerage area is arguably worth about $8 billion or $15 per share.
The two remaining divisions have been unhampered by controversy. The Mercer consulting division has been growing and should contribute about $500 million of operating income. Again, by applying a multiple of 10 times operating income, Mercer may be worth about $9 per share. The Kroll risk management division has done well and is probably worth another $4 per share, bring the entire value of MMC to about $39 per share, significantly higher than the current $31 per share. However, the long term debt level has risen and when subtracted, the intrinsic value seems close to current market levels.
MMC agreed to sell Putnam for $3.9 billion, rather than the $6 billion estimated here. This means that Putnam's funds were valued at 2% of AUM and 9X EBITDA. Such a valuation is much lower than other mutual fund purchases.
ReplyDeleteIn 2007, Putnam was sold for 2/3 of estimated value here. Then in 2010, Kroll was sold for 1/2 of estimated value here. Further, in 2011, five years after this analysis, MMC stock was still at $31. However, as of 2020, slightly over 8 years after 2011, MMC quadrupled - far outpacing the S&P 500. Careful pruning and consistent focus appears to have created a stronger ultimate business.
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