MARSH & MCLENNAN COMPANIES INC. (NYSE: MMC) is guilty of having one of the TOP 10 CEO’s TO GO FOR 2008.  Michael Cherkasky is both President & CEO of the broader "Marsh-Mac" group of companies.  One real problem is that Cherkasky came into this position as a legacy chief executive officer left over when Kroll was acquired.  He was also chief of investigations for the New York County District Attorney before joining Kroll.  He is the right guy for the risk segment and Kroll was a success under him, but he is not at all the right guy to be head of the entire Marsh-Mac group of companies.

The dislike and dismay for Cherkasky hasn’t and won’t end with Monday’s announcement that AIG’s Daniel Glaser will become CEO of the Marsh Inc. insurance brokerage unit.  Wall Street really does want Cherkasky to go back into the risk management side of the equation (or just out), and after being top dog at the parent he won’t likely accept the deserved demotion. 

Marsh-Mac’s core earnings just fell 40% and were under expectations.  Standard & Poor’s lowered the counterparty credit rating of risk to "BBB-" just this week and that is now the lowest investment grade ranking.  If the rating drops to junk, it may have severe issues in its clients accepting business from them because of the credit risks.

A Toronto-based private investment management firm K.J. Harrison & Partners has asked Marsh-Mac for a shareholder vote to spin off its Kroll subsidiary and its Mercer subsidiary units at the 2008 annual meeting in an attempt to maximize shareholder value. CEO Jim Harrison has stressed that the financial services company has little credibility with its shareholders and little credibility with the investment community.

The recent sale of its Putnam mutual fund subsidiary, which was sold to Power Corporation of Canada, was not effective nor was the value maximized as it could have been spun off to Marsh shareholders in a tax savings and giving more value to investors. It sold Putnam for $3.9 Billion but received only about $2.5 Billion net of taxes and minority interests.  This whole $3.9 Billion could have gone in a tax-free spin-off to shareholders (short of minority interests), and it has done nothing to bolster its credit ratings.

Over the last two years this stock is down roughly 22%, and it’s down about 18% in the last year as well.  Since the investigations in late 2004, Marsh-Mac has become dead money and rides still at the bottom of what feels like a permanent trading range and it cannot blame the CDO and liquidity crisis as the culprit.  Cherkasky hasn’t even been able to offset the negativity despite an accelerated share repurchase program that has taken the share count from 558 million down to 540 million with more share buybacks in this quarter.  It isn’t working and a CEO should only be allowed to spend so much money out of the coffers merely to appease holders.  Even its 3% dividend isn’t viewed favorably.

There are many actions that a newer CEO could implement and there are several key issues surrounding the company:

• because of its size it arguably has the lowest price-book ratio in the sector;
• its P/E ratio is under 20 and it trades under 16-times 2008 estimates;
• it can be re-carved back into pure-play organizations as marsh, Mercer, and Guy Carpenter and even Kroll could be spun-off, even though it was acquired.

The raw truth is that there is actually considerable value here in the stock compared to peers, but Wall Street wants this ongoing turnaround to be re-initiated by a new head (and maybe a mostly new team).  24/7 Wall St. believes that if Mr. Cherkasky doesn’t do the right thing by leaving on his own, then the board of directors will make Cherkasky’s retirement announcement for him before the 2008 annual meeting.  We believe that a Cherkasky departure might be worth as much as 5% to 8% alone, although the company needs to learn the lessons of Citigroup and have a successor in mind (but not Chuck Prince).

• GUIDELINES FOR SELECTION

Jon C. Ogg
December 6, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.

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