In an age of megamergers and frenzied acquisition activity, it seems somewhat odd to single out a finance executive who is as proud of the deals he didn’t do as of those he did. To be sure, Frank J. Borelli has spearheaded two multi-billion-dollar mergers in the past two years. But the CFO of Marsh & McLennan Cos., a diversified professional services firm based in New York, considers himself more a master of restraint than a master of the universe.
“It’s all a matter of discipline,” says the 65- year-old Borelli, winner of the 1999 CFO Excellence Award in the Mergers & Acquisitions category. “You can’t be afraid to turn down an acquisition. Too many people feel it’s almost an obligation, that they’re losing if they can’t do a deal. No deal is a must. The point is, what will really help the company at the end of the day?”
By all appearances, Marsh’s recent deals for two large insurance services firms–the $1.8 billion merger with Johnson & Higgins in 1997 and the $2.2 billion acquisition of Sedgwick Group in 1998–have really helped the company. Revenues for the first six months of 1999 reached $4.6 billion, up 30 percent over the same period last year, while net income increased 20 percent, to $507 million. Moreover, the compelling evidence of both cost savings and revenue enhancements from the mergers has helped Marsh’s stock price nearly double since the Sedgwick deal closed last November, to a 52-week high of $81 in July.
“Our recent combinations were pivotal events in the history and development of our risk and insurance services operations,” says Marsh chairman and CEO A.J.C. Smith. “Frank’s role was critical not only in accomplishing the mergers, but also in helping develop the plans for the integration of these major firms into our organization.”
Borelli has been at the merger game for most of his professional life. He cut his teeth in the 1970s as national M&A coordinator at Haskin & Sells, consulting with acquisitive clients on their due diligence and other preacquisition efforts. Joining Marsh & McLennan in 1984 as CFO, he devised and distributed a set of acquisition criteria as consolidation in insurance services–the largest of Marsh’s three divisions–started heating up in the early 1990s. These criteria primarily concerned the target company’s growth rate and cost of capital and whether the deal would dilute earnings.
Still, the guidelines hardly thwarted internal pressures to do deals. “Frank, you don’t understand, we really do have to get bigger,” senior sales executives would tell Borelli when he would report that the numbers on a possible acquisition looked ugly. But Borelli, who estimates that he bypassed three major targets in the past five years, was undaunted. “When you do acquisitions, it’s not all fun and games with revenues,” he says.
But Borelli jumped when he learned that Johnson & Higgins, the world’s leading privately owned insurance services firm, was looking for a merger partner. Such a combination was a once-in-a-lifetime strategic opportunity. The challenge was to maintain extreme secrecy, because J&H was a highly coveted firm and because valued J&H senior managers might leave.
It wasn’t easy keeping things quiet as the complex negotiations for the private firm, with its 27 principal owners, dragged on for five months. From Borelli’s perspective, the chief concern was structuring the deal so that about 800 key professionals whom Marsh wanted to retain got some of the financial proceeds from the sale, much as they would have if J&H had been public.
“These 800 key people were what we were really buying,” says Borelli, who convinced the J&H partners to allocate about $400 million in Marsh stock from the total purchase price to this employee group. In consideration, he structured the $1.8 billion deal so that it was paid one-third in cash, which allowed the J&H partners to minimize their tax liability but forced Marsh to carry goodwill on its balance sheet. “We factored that in very carefully in the pro formas,” Borelli says. “It was not a deal breaker.”
The due diligence was also a challenge, and Borelli insisted on a substantial escrow account for contingent liabilities. “Frank was tough on the escrow conditions,” says Ned Kelly, head of the financial institutions group at J.P. Morgan, in New York. And apparently wise. The $28 million settlement in July of an age-discrimination case brought against J&H in 1993 will end up costing Marsh almost nothing, because of the provisions Borelli negotiated before the deal closed in March 1997.
Too Good to Pass Up
In the months afterward, Borelli and his colleagues oversaw the efforts of 31 integration teams that delved into everything from real estate to benefits in order to eliminate redundancies and mesh the cultures. These task forces also sought out best practices from the two companies–for instance, embracing Marsh’s systems and J&H’s sales approach to prospective clients.
“This felt like truly a merger of equals,” Borelli says. Indeed, Marsh did not lose any of the J&H talent it had wanted to keep, nor any clients. And while the company was able to wring out some $200 million in cost savings, it saw its pretax earnings in the insurance services division increase significantly. The deal also quieted insiders pushing Borelli to do more deals. “They settled down after they found out there’s a lot of work in acquisitions,” he says.
But last summer, when Sedgwick Group, a British-based insurance brokerage consulting firm, approached Marsh about being acquired, the opportunity was too good to pass up. With its strong international presence, Sedgwick would allow Marsh to fill gaps in its operations in Europe and the Far East. And although dilution was expected in the first year, the market opportunities and cost savings were attractive.
Two headaches emerged before the acquisition could close. Marsh had to supply three thick binders of data and analysis before convincing the European Commission that the deal would not result in too much concentration in one insurance services firm. “The judgment was favorable, but the time and effort were immense, and delayed us by a month and a half,” Borelli says.
The other headache came with the softening of the equity markets right after Marsh announced the acquisition. Financing the deal with debt added enough leverage to threaten the company’s credit rating, and Borelli had anticipated reducing borrowing levels with a $300 million equity offering.
As it turned out, timing was on his side. By the time Marsh finally did its offering in April 1998, the equity markets were strong again and the firm’s stock price had rebounded dramatically from a 52-week low of $43. The company has met its repayment terms and maintained its credit rating, and continues toward reducing its leverage. Furthermore, as the integration task forces have sought synergies and cost savings, Marsh has seen less dilution than anticipated.
“Both deals have strengthened Marsh’s worldwide presence” and earnings, says Gary Ransom, a research analyst at Conning & Co., a Hartford-based asset manager specializing in the insurance industry.
As for Borelli, he says the secret to successful M&A is simple: It comes down to reading people. “I know it sounds like an intangible rather than an overriding philosophy or tactic,” he says, “but you don’t want [your future partners] to become disenchanted or discouraged.” The result, he says, is that “you lose their allegiance and the momentum to get them to do what you bought them for.”
Without divulging details, Borelli says he’s seen all kinds of characters in his career. But the one thing that gives him the confidence that he can read people right, and do deals that are right, is the simple notion that he can always walk away.