With the E.U. having approved the deal, only one question remains: Just how much of a train wreck will the Marsh/JLT merger be?
Before answering that question, however, it is first worth understanding the circumstances that led to the deal happening in the first place.
Let’s clear one thing up straight away. The one thing this deal wasn’t, despite all carefully crafted protestations to the contrary, was strategic. JLT did not in my view sell because it believes that the combined business will be a better or faster-growing one or because it had run out of road -- the 5% organic revenue growth, 25% growth in underlying trading profit and 18% improvement in the underlying trading margin contained in the last set of results
would certainly suggest otherwise! Rather, JLT's hand was forced because Jardine Matheson decided it wanted out, and management decided that a sale to Marsh was the least worst option. At least, that’s the rather convenient line that I'm sure is being peddled internally.
Of course, there would be an element of truth to this: The changing of the senior guard at JM over recent years -- in particular, the untimely death of Rodney Leach -- would inevitably lead to an internal re-evaluation of the wisdom of JM holding such a significant investment outside of its core Asian markets. But there were other factors at play, too.
First, JLT’s bold U.S. retail strategy was unlikely to meet the commitments made when its plans were announced in September 2014 ”that the business will start to contribute to profits in 2018 and then generate an accelerated return thereafter,” despite the huge progress that had been made. Selling out now avoided some very awkward questions from increasingly impatient investors. Second, JLT had signally failed to put in place a credible CEO succession strategy, not helped by a sense that anyone else would hold the group together – which would have no doubt played a major role in JM’s own thinking and willingness to fund staff retentions to the tune of £50 million in its anxiety to get the deal away. Louis XV once said, “Après moi, le deluge
.” A sale solved a problem that JLT's board had been unable or unwilling to tackle for years.
From Marsh’s perspective, it is also hard to see the deal as in any way strategic, unless getting bigger is a strategy -- which in the case of Marsh of course it may well be! Combining the two businesses will not magically boost Marsh’s organic growth rate – if anything 2+2 here may well equal 3, at best. It is also hard to believe that the merged business will allow Marsh – lest we forget, already the world’s largest broker - to access markets or territories that were somehow previously closed to it.
In fact, the biggest factor here -- beyond CEO ego, which is probably the single most under-appreciated factor in all large scale M&A -- was almost certainly the fear that, if Marsh didn’t buy JLT, Aon would. A fear almost certainly shared, by the way, by the JLT management team, who have demonized Aon for years. The opportunity for Marsh to put clear blue water between itself and its nearest competitor, could not be missed, even if the result is something of a Frankenstein creation. Aon’s aborted pursuit of Willis shows that these things matter, and no doubt that deal will also happen at some stage.
Coming back then to my original question around the prospects for the merger: Perhaps the best way to answer that is by using the litmus test that JLT has long claimed to use to assess all major decisions, namely the desire to balance the interests of “our four key stakeholders: our clients, our colleagues, our trading partners and our shareholders.”
From a JLT shareholder
perspective, this was clearly a stunning deal – all credit to JLT's management team for bending Marsh so far over the barrel that they must almost have been touching their toes on the other side. If anything proves Marsh’s white-knuckled determination not to let JLT slip through their fingers into Aon’s embrace, it was the price they paid. Given that the JLT’s board’s primary responsibility is a fiduciary one, who can blame them or have any complaints? What this means for Marsh’s shareholders though is another matter.
From a client
perspective, it is hard to see the deal as anything other than negative. These were already two very good businesses – putting them together may fill in some gaps here and there for Marsh (e.g. LatAm, Asian EB, Australian public sector) and bring some extra capabilities to JLT (e.g. analytics and engineering), but it doesn’t radically improve the overall customer proposition. In fact, it may have the exact opposite effect for many customers as, in a market already dominated by three silverbacks, the loss of the one challenger willing and able to upset the natural order of things will be keenly felt. Inevitably, this will lead to client losses, particularly from some of the larger accounts, who will not be willing to put their eggs in one basket or in the same basket as one of their major competitors.
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What, for example, are the prospects for JLT’s U.S. wholesale business, which had previously managed to convince its producing brokers that JLT's U.S. specialty-focused play didn’t really compete with them but may now find that argument ringing somewhat hollow! What is the outlook for JLT’s hard-won U.S. specialty business, which has been largely built off the back of its ability to position itself as radically different from the big three? What is the future for JLT Re, whose strong march over the past few years has been fueled by its clients' desire to diversify their placement and its team’s ability to bring a fresh perspective? Don’t also forget that much of JLT’s success has come from winning share from its major competitors, including Marsh. The idea that these same clients will allow themselves to be tamely shepherded into the Marsh fold is wishful thinking. At best, they might tender the business -- but, with JLT out of the way, Aon and Willis will now be as likely to win the business as the enlarged Marsh is to retain it.
From a trading partner
, or insurer, perspective, the deal is nothing short of disastrous. The forced sale
of JLT’s market-leading aviation business to AJG by the E.U., at what seems to be a knockdown value for the best franchise in the market, probably deals with the biggest area of market concentration but doesn’t solve the bigger issue. I don’t know what Marsh/JLT’s combined share of Lloyds’ is, for example, but I would have thought it could be 30% to 40%. In some classes, a lot more. It will be the same picture elsewhere. That is a big problem, albeit one of the market’s own making, as it has consistently rewarded increased placement scale with better commissions, thereby slowly strangling itself to death.
The growth of JLT has been at least partly due to the markets deliberately nurturing it as a counter-point to the dominance of the big three and offering it terms that allowed it to compete on something approaching a level playing field. Of course, some of the larger markets will be seeing this as an opportunity to grab an even bigger slice of the combined book. But the prospects for many of the smaller markets, which JLT had supported by eschewing the programmatic placement of its larger competitors and distributing risk far more widely across the market, are bleak.
Which brings us finally to people
. And this is where the harsh reality of the deal really hits home. Job reductions of 2% to 5% of the combined workforce of 75,000 are planned. That is 3,500 people, with families and mortgages and careers, effectively funding the bulk of the short-term deal benefits. And whatever has been said about selecting the best of breed, etc., everyone knows where the brunt of these job losses will fall. In the words of Sen. William L Macey – “to the victor belong the spoils.” Hard to see who the winners are here, apart from those cashing in their share options and heading for the race track.
What then are the prospects for Marsh’s own shareholders? Well, there are some positives to cling to. There will be some geographic complementarities in Asia, Australia and LatAm, where JLT is strong. JLT’s fantastic offshore operation in India also provides a template for Marsh to replicate on a far larger scale, creating a huge opportunity to drive cost and operational efficiency through the business. The cost synergies, as already mentioned, will be significant – I would guess that the stated target of £250 million will be comfortably beaten - Marsh has been around the block enough times to know to under-promise and over-deliver in this area. And from a revenue perspective, there is a big opportunity to re-engineer JLT’s book and take advantage of Marsh’s more aggressive approach to squeezing insurers for enhanced commissions, work-transfer fees, consultancy arrangements, re-insurance placements and all the other weapons in the broker’s arsenal of dark arts.
The only problem, of course, is that this is all one-off. Extracting the cost synergies and re-engineering the book will significantly improve short-term profits. But it won't deliver the long term organic revenue growth that will be required to justify the nose-bleed multiple that Marsh has paid. Although of course, by the time anyone runs the actual numbers, it will probably be someone else's problem to deal with!
The real question, therefore, is whether the profit improvement will offset the unavoidable attrition that will result from the combination of the two businesses. Attrition born partly by clients voting with their feet, for the reasons already set out above, but more out of the collateral damage caused by the inevitable clash between the two business’ cultures.
It is hard to overstate just how big an issue this is likely to be. JLT was a disruptor. It deliberately positioned itself (not always very accurately!) as the nimble, entrepreneurial, innovation-led counterpoint to Marsh, Aon and Willis’ slow, monolithic and commoditized approach. In a market drowning in a sea of sameness, JLT was able to articulate a distinctive message with real cut-through that was hugely successful in attracting some of the best people in the market from the big three, by making them feel special and part of something different and better. It was almost tribal – you were either lucky enough to be invited to be part of JLT, or you were against them. Whatever the cold economic logic of the circumstances that led to JLT selling out, many will always view this decision as an unforgivable betrayal of trust, such was the power of the "cult" that JLT had created.
It is patently nonsensical to now expect these same people – who in choosing to work at JLT had in most cases consciously rejected the opportunity to work at one of the big three to benefit from JLT’s culture and more delegated approach to management and placement - to accept life under Marsh’s command-and-control management style. It makes you wonder whether Marsh really understand what they have bought or the challenge they will face in hanging onto it. The story I have heard (which I have no way of verifying) is that the deal was struck in little over a week – if true, I’ve spent longer choosing wallpaper!
The oddity, of course, is that if there was one real strategic opportunity from this deal it would be JLT injecting some of its entrepreneurial DNA into the Marsh culture and giving it some of JLT’s street-fighting swagger. I'd love for that to happen. But history tells you that it is the one thing that is most likely to be lost.
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Whatever retentions are put in place – and a staggering £75 milliion has been earmarked for this purpose up until the deal completes -- the best people will surely leave, as they always do. And there will be no shortage of people looking to offer them a home, or private-equity companies willing to back the right management teams.
If I had to make a prediction, I would say that Asia, Australia, U.K. mid-market insurance broking and EB will be pretty stable. But JLT’s European network will fragment, as I doubt any of them will take the Marsh shilling. JLT’s LatAm minority interests will sell out to Marsh, providing some short-term stability, but good luck enforcing a restrictive covenant in Peru or Chile when their earn-out comes to an end in three or four years’ time! JLT Re will, you would think, given the over-concentration of the broker market, have largely re-constituted itself somewhere else within a few years. JLT’s London market wholesale and specialty business will fragment, attracted either to specialist competitors or to one of the various PE-backed start-ups that are circling JLT's carcass. JLT U.S. will also fragment as the team disperses, whether together or across the market, bringing to an end one of the most impressive market entry initiatives in recent memory.
How much business could be lost? Your guess is as good as mine, but if I had to speculate I would say 30%, maybe even 40% in some areas over the next few years, as people leave and clients move.
But here’s the best part: The Marsh shareholders may well not even care! When you lose the revenue, you lose the associated costs, as well, and many of these brokers are very well paid indeed. The combined impact of the cost savings and the portfolio re-engineering, plus the undeniable benefits of scale in today’s market, may well mean that Marsh can afford to take this level of revenue loss and still deliver a good return to its shareholders, having in the process also taken out an increasingly annoying thorn in their side.
The big winners here – apart from the headhunters who must already have their new Porsches on order and the deal advisers pocketing hundreds of millions of dollars of fees - will almost certainly be the next tier of brokers, who stand to hoover up talent and business in the biggest feeding frenzy the market has seen for a long time. In particular, Hyperion and AJ Gallagher would seem to be well-positioned as the natural successors to JLT’s crown, with a growing global footprint and a proposition (at times more aspirational than actual) focused around specialty and agility, that many within JLT will find reassuringly familiar and attractive. I would also have thought that some of the bolder U.S. brokers such as Acrisure, Alliant or Assured Partners, looking to grow outside of their domestic markets, may well also see this as an unprecedented opportunity to build an international bridgehead.
Overall, though, it is hard not to feel sad as another great London market name bites the dust. JLT’s shareholders are undeniably richer, and maybe in the modern world that's all that matters - what choice did they really have at the end of the day? But JLT’s clients, colleagues, trading partners and the market at large will be a lot poorer for its passing. Couldn't a BlackRock or a KKR have taken JM's stake off its hands and .... we will unfortunately never know.
But perhaps this isn’t the end of the JLT story. Some phoenixes will almost certainly rise from the ashes of this deal.
This article originally appeared here.