EXHIBIT 99.3
MAY 19, 2004 TRANSCRIPT OF TELECONFERENCE AND LIVE AUDIO WEBCAST
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Operator
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Good day and welcome to the Marsh & McLennan Companies, Inc. and Kroll
Inc. investment community conference call. During this call, MMC and Kroll will
be discussing a definitive merger agreement between the two companies.
The press release regarding the merger and additional information are
available on the investor pages of both Web sites, www.mmc.com and
www.krollworldwide.com. This call is being recorded and will be made available
on both Web sites.
Comments regarding future expectations, trends and market conditions,
including cost savings and synergies, as well as other topics, may be considered
forward looking under the Private Securities Litigation Reform Act of 1995.
Neither MMC nor Kroll assumes any responsibility to update any forward-looking
comments.
These forward-looking statements may involve risks and uncertainties
that could cause actual results to differ from current expectations, including
MMC's ability to integrate Kroll's business successfully and the accuracy of the
basis for the forecast related to Kroll's business.
Kroll will file a proxy statement with the Securities and Exchange
Commission, and we urge you to read it because it will contain important
information. Other risks and uncertainties are described under the companies'
forward-looking statements disclosure and their respective reports on Form 10-K
and 10-Q, filed with the SEC and available through their Web sites.
Before I turn the conference over to MMC Chief Financial Officer
Sandra Wijnberg for opening remarks and introductions, I would like to let
everyone know that if you would like to signal to ask a question, you may do so
by pressing the star key, followed by the digit one, on your touchtone phone. We
ask that you please limit yourself to one question and just re-prompt if you
would like to ask a follow-up question.
I'll now turn things over to Ms. Wijnberg.
Please go ahead.
Sandra Wijnberg - Marsh & Mclennan Companies - SVP and CFO
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Good morning, everyone. As you know, yesterday we announced that MMC
will acquire Kroll for $37 a share, or $1.9 billion. We anticipate closing the
transaction in the third quarter. On the call this morning, we have Jeff
Greenberg, Chairman and CEO of MMC. From Marsh, we have Ray Groves, CEO, Roger
Egan, President, and Don Birdsong, who heads up Marsh's risk consulting services
business.
From Kroll, we have Jules Kroll, Chairman, and Mike Cherkasky, CEO.
With that, I'd like to turn it over to Jeff.
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
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Thanks, Sandra. Welcome, everybody. I'll speak briefly about the
strategic and financial rationale for the deal, and after that, Mike will say a
few words, and he'll be followed by Sandra to give additional financial
information, and then we'll take your questions.
To start out, we are very excited about this transaction. MMC is a
unique company, and so is Kroll. What we see here is a combination of two growth
businesses in risk services. It's a powerful strategic fit. The combination, we
think, will accelerate the expansion of our risk services business, where we see
growing client demand. So we believe that we'll be able to serve clients better,
more effectively, through this combination. We see that demand growing globally.
What we like about it is that it is really in our core business. So we
see earnings growth and earnings diversification, two things from this
transaction. Diversification is that these revenue streams are not correlated
with the insurance cycle, and of course we expect it to contribute to growing
shareholder value in MMC.
In order to understand this deal, I need to give you some background
for context. To start out, the mission of MMC's risk and insurance services
business is to help clients to lower the total cost of risk to their
enterprises. Traditional insurance broking plays a part, and so do other
services.
Now, we've been investing in risk-related services because we've been
seeing growing demand from our clients and for a host of reasons that will be
familiar to you. To name a few, post-9/11 security concerns that are global.
Secondly, a host of new government regulations around the world, Sarbanes-Oxley,
certainly well known here, BASIL 2 (ph), which affects banks, and a host of
others. All of them have increased corporate accountability and a need for
compliance.
The third, corporate restructurings and bankruptcies and M&A
activities have led to a need for more risk services over time, and we see that
continuing. There's been a growing incidence of complex litigation and spreading
around the world, which has also led to client demand for risk services. And in
addition, the spillover effects of globalization, which have led to complexity
and caused clients to have to deal with new risks they didn't contemplate
before.
Lastly, the whole issue of workforce quality, not only reflected in
the insurance business in worker's compensation costs, but the emphasis on
having a high-quality workforce, human capital and all of the issues that attend
that in the way of risks and risks services that we've been dealing with and
Kroll has been servicing as well.
Ten years ago, Marsh's risk consulting and advisory business was less
than 2% of our risk and insurance services revenues. At the end of last year, at
the end of '03, those services represented about 15% of MMC's total risk-related
revenues. Total risk-related revenue stakes in
all of Marsh, some small part of Mercer, and last year totaled about $7 billion.
And about $1 billion of that $7 billion in revenues came from risk services.
They've been growing well in the double digits, about 30% growth rates
for the last several years, and we've been investing in them, and growing them
both through internal efforts and through acquisitions.
Kroll is simply the latest and the largest in a series of acquisitions
to strengthen our position in risk services. Some of our acquisitions will have
been familiar to you. Last year, we acquired Oliver Wyman. It's now part of
Mercer. Oliver Wyman helps clients to understand their risks better. This
includes valuing risks, analyzing risks, and therefore making decisions about
how to handle them. They're specially strong with financial institutions.
We also help clients to manage their risks better through collecting
and handling data. Marsh has a first-class risk management information systems
business, and about a month ago, we announced the acquisition of Corporate
Systems, which is a claims management and reporting technology firm, to aid in
the growth of that business to serve clients with additional skills that
Corporate Systems brings to us.
We've helped clients to avoid risks through screening and testing, and
we've helped them to reduce risks after or before a risk event. A risk event
could be a planned event, like an acquisition, or it could be an unplanned event
- - it could be complex litigation, or it could be an insured loss or a loss of
any kind, where clients seek mitigation capabilities that we've provided and in
fact Kroll provides.
Now, of course, all of these services complement Marsh's largest
business, which is helping clients to structure risk management programs and to
transfer risk.
Now, turning to Kroll. The organization has four main businesses.
Consulting services, which is their oldest lines of business, investigatory
work, forensic work. Corporate advisory, which gets involved with corporate
restructurings and bankruptcy. They are the only global player in that field.
Background screening, which is screening of employees, mortgage screening as
well, and technical services, which is a series of different businesses, e-mail
document discovery, data recovery, both of which have been growing fields.
Kroll employs about 3,200 people. They bring a very strong reputation.
As we've come to see them, they're very talented leaders and staff. And we're
experienced acquirers in professional services. We've made our share of
acquisitions. We know how to judge professional orientation. We know how to
judge professional quality and work for clients. And we see a very strong
cultural fit between our two firms.
They operate in 60 offices in 20 countries. They're especially strong
in Europe, and we've been growing our own presence in Europe. That's an area
where Mathus Calgulavetta (ph) has done especially good work, building on our
strengths over the years, and we see a great fit in our European businesses.
The client roster that Kroll brings includes many in the Fortune 500,
a vast majority of the top law firms, government work. Kroll's tripled in size
since 2001 through a combination of internal growth and acquisitions.
Many of the markets in which Kroll competes are growing rapidly, and
they're highly fractured markets. So we see great opportunity for continued
growth there. This year, Kroll's revenues should approach $700 million, which is
a hefty growth rate over the last year.
After the transaction closes, combined revenues from our consulting
and services business will approximate 25% of our revenues in risk-related
services, which includes all of Marsh and those parts of Mercer that offer risk
services.
We think that the combination of Marsh and Kroll will enable us to
offer end-to-end risk mitigation services to our clients, for diagnostics and
analytical tools, to post-event consulting and advisory services, and we think
that this complement of services will continue to significantly differentiate
our firm in the marketplace, within numerous areas where clients will welcome
packages that combine the services of both firms.
The acquisition of Kroll will also expand Marsh's capability in
helping clients to process and manage information about risk. And we think
that's a scalable business. It has been for us, has been for them, and has
attractive economics to it. And we think it enhances our processing capabilities
by adding background and vendor and credit screening services
So it's the range of services that are now being offered. It's the
combination that's now being offered that we think will both be valuable to
clients. And we think that certainly we will serve clients better through the
combination of the two firms and in areas that have high growth.
Based on our own strategic and financial due diligence, we think that
Kroll's rapid growth is going to continue and, in fact, is going to be enhanced
as part of MMC. When we look at this strategic fit with Marsh and parts of
Mercer, when we look at selected cost savings and potential revenue enhancements
that we see, we think this transaction's going to be accretive in its first full
year of operations.
And I should add, I've been involved in our acquisitions since I
rejoined the company in 1995. We tend to be pretty conservative around Marsh &
McLennan. We typically under-promise and over-deliver. So the numbers that we're
using today are numbers we're very comfortable with.
This transaction plays to a core strength of MMC, which is that we
create value for shareholders in addition to the other things we do, like
successfully making and integrating acquisitions. And we look forward to
completing this acquisition as quickly as possible and to delivering the
benefits and to our shareholders.
Now Mike is in L.A. This morning but he's on the call. And Mike, would
you like to make a few comments?
Mike Cherkasky - Kroll - President and CEO
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Yes, thanks, Jeff.
I think Jeff has done a great job explaining the strategic rationale
for the transaction, so we'll just have a few comments. They may be, actually, a
little boringly consistent with what Jeff said, and maybe that's one of the
great aspects of this deal, is that we look at the world the same way.
First, the business idea of Kroll has been simple - to help solve
risk-related problems for our clients. Today, those problems are more
complicated, more global and more serious than ever before. We're convinced that
the Kroll-MMC combination will provide our clients with an unprecedented breadth
of risk-related solutions, and that's what they want.
Second, we at Kroll are extremely proud of what we have accomplished
over the last few years, and we were looking forward to a future of continued
strong growth and improving operational metrics as a standalone company.
But this opportunity came along, which was attractive for our
shareholders because we believe MMC recognized the strength of our brand, our
people, and the real and meaningful synergies that these two organizations can
achieve together. We now believe Kroll's future inside MMC is even bigger and
better. Reflecting that belief, the transaction was enthusiastically approved by
our board of directors, which recommends that Kroll shareholders vote in favor
of the transaction.
Jules Kroll, I and several other members of the Kroll senior
management team, together representing over 10% of the Kroll stock, are
committed to vote in favor of the transaction. But I want to assure our tens of
thousands of clients and our thousands of professional employees around the
world that we would not be doing this transaction unless we absolutely had
confidence that it would benefit our clients, our employees and our business.
MMC does have a long history and a fine reputation for being an
excellent owner of professional service firms. Marsh and Kroll, as Jeff says,
are both industry leaders in the risk services business.
We think that bringing together our respective businesses and
capabilities makes tremendous sense. Our respective risk services are highly
complementary in the ways that have been described. We are enthusiastically
looking forward to becoming part of the Marsh organization.
I do want to emphasize that as the press release indicates, Kroll will
will continue to operate under the Kroll name and that I will continue to head
and lead that organization in partnership with our new colleagues. Jules Kroll
will be named a Vice Chairman of Marsh and will continue to be actively involved
in setting the strategic direction of the Kroll business. And together, we and
our new colleagues from Marsh will do what we at Kroll have been doing for 30
years, empowering clients to venture more securely in today's complex and
risk-fraught business environments.
Thank you, and I'm going to turn it over to Sandra Wijnberg.
Sandra Wijnberg - Marsh & McLennan Companies - SVP and CFO
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Thanks, Mike. I'll spend just a few minutes outlining the financial
aspects of the transaction and then we'll open it up to your questions. The
total purchase price of $1.9 billion, or $37 a share, includes all the share
equivalents, underlying options, earn-outs, and assumes that all of Kroll's
outstanding convertible notes, both the 6%, due '06, and the 1.75 due 2014 are
exchanged for equity.
We expect to close in the third quarter, and we expect to finance it
with a combination of debt and cash from operations. We've already reviewed the
deal and its impact on MMC with both rating agencies.
Our strong balance sheet and coverage ratios provide a great deal of
financial flexibility. When combined with the incremental cash flow generated by
Kroll, our credit ratios are expected to be back in line within 12 months.
Turning to the P&L, assuming one full quarter of results following
completion of the transaction, Kroll will add about $165 to $175 million of
revenues to our fourth quarter. We're currently estimating that after the
acquisition-related cost and interest expense, the transaction will be neutral
to our fourth-quarter EPS.
In the first full year, which is 2005, we expect Kroll to contribute
$800 to $850 million to our revenue base. From a reporting perspective, we'll
combine Marsh Risk Consulting and services with Kroll under the risk and
insurance services segment and disclose both according to underlying revenues,
as is our tradition.
We've already identified $30 million of annual efficiencies and cost
saves. As we work on integration through the summer, we're confident we can
achieve additional infrastructure and cost efficiencies to increase margins and
profitability. The revenue benefits associated with combining our capabilities
is at least as great as the savings, and will continue to grow.
The acquired business quickly gets to a 20% margin, including
synergies and acquisition cost. These costs are heavily skewed to the early
years and include the amortization of intangibles and integration expenses. We
believe on a longer-term basis we can operate the business with a margin in the
mid-20s.
We expect that after interest and taxes, the transaction will be
accretive to our full-year 2005 earnings by two cents a share, and '06 earnings
by about four cents a share. Our Kroll's businesses in total are expected to
produce ongoing revenue growth in the mid teens, and the combination of our
businesses together does nothing but support that growth and perhaps accelerate
it.
With Kroll's revenue growth and margin improvements, earnings
accretion in future years should accelerate. If you compare the use of our
balance sheet for this transaction to alternatives such as repurchasing our
shares, the EPS accretion from this exceeds that of the debt-financed share
repurchase beginning in 2006. And then it's obvious that the incremental cash
flow from operations that we gain from growing our business contributes to our
ability to invest back to return capital to shareholders through dividends and
share repurchase.
With that, I'd like to turn to the conference operator to open up the
lines for Q&A. And if you wouldn't mind, limit your questions this morning to
our acquisition of Kroll. Thank you.
Operator?
QUESTION AND ANSWER
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Operator
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Thank you, ma'am. The question and answer session will be conducted
electronically. If you would like to signal to ask a question, you may do so by
pressing the star key, followed by the digit one, on your touchtone telephone.
If you are on a speakerphone, please make sure that your mute function is turned
off to allow your signal to reach our equipment.
Once again, everyone, please press star, one at this time to signal
for a question, and we'll pause for just a moment to give everyone an
opportunity to signal.
And our first question today comes from Jay Cohen, Merrill Lynch.
Jay Cohen - Merrill Lynch - Analyst
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Yes, just one clarification. The cost savings you mentioned, Sandra,
was that $30 million or $3 million?
Sandra Wijnberg - Marsh & McLennan Companies - SVP and CFO
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Thirty. Thirty million that we've identified so far.
Jay Cohen - Merrill Lynch - Analyst
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That's what I thought I heard, OK. I guess the question I have is as
far as kind of cross-selling goes, it seems that maybe the people out there at
your client that are making these kind of buying decisions are different people,
whether it's insurance or risk services.
How have you found at Marsh the cross-selling to go between those
types of businesses, and obviously do you think this will play out as far as
cross-selling goes, given that you might have different people buying different
products.
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
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We're going to ask Roger Egan, who is president of Marsh, to answer
that question, Jay.
Roger Egan - Marsh & Mclennan Companies - President Of Marsh, Inc.
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First of all, I don't think we quite view it as cross-selling. We view
it as combination as forming one kind of integrated offering. We have a
collection of distinct risk practices and the way we operate our model is to
have a client executive who is a generalist bring in specialists to meet the
client needs. And the combination of the Marsh Risk Consulting practices and the
Kroll risk mitigation practices just offers a broader range and combination of
risk mitigation services.
It's not quite cross-selling. It's a generalist who leads and brings
specialists to the table. It's consistent with the model that we have right now.
Kroll operates this way. Marsh operates this way. It's much more integrated than
separate and distinct operations that cross-sell, as you've suggested.
Jay Cohen - Merrill Lynch - Analyst
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That's great. Thanks, Roger.
Operator
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We'll go next to Ron Frank, Smith Barney.
Ron Frank - Smith Barney - Analyst
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Yes, good morning. A couple of things. One is, clearly the senior
management of Kroll, and I assume some key employees beyond them, are
significant stockholders, and this is an all-cash deal, and I was wondering if
you could discuss not even so much the top management, but perhaps how the next
level of managers have been incented to remain committed to the combined
organization.
And second, Sandra, I was wondering if you could just clarify on the
repurchase, I wanted to make sure I heard correctly that you felt that or had
determined that the acquisition would be more accretive than debt-financed share
repurchase starting in '06. Was that also applied to internally financed
repurchase? Because clearly you'd be generating a fair amount of excess cash at
that point and even not have to use debt.
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
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OK, let's have Sandra answer the second question first, and then we'll
turn to Ray Groves, Chairman of Marsh, on the first question.
Sandra Wijnberg - Marsh & McLennan Companies - SVP and CFO
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When I was doing that analysis internally - way ahead of this
transaction, by the way - I was assuming that when our capital structure got
back to a normal level, we would be repurchasing it at the same pace.
So, to answer your questions, the incremental debt applied to the
transaction versus the speeding up our share repurchase program. Other than
that, it's just base.
Ron Frank - Smith Barney - Analyst
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Oh, I see. OK, so it's versus applying the debt used in the Kroll deal
to repurchase as an alternative.
Sandra Wijnberg - Marsh & McLennan Companies - SVP and CFO
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Yes, speeding up our share repurchase.
Ron Frank - Smith Barney - Analyst
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OK, speeding it up. OK, thank you.
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
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And now we'll ask Ray Groves, Chairman of Marsh, to talk about the
management incentives in the Kroll organization.
Ray Groves - Marsh & McLennan Companies - Chairman of Marsh, Inc.
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Marsh and Kroll, including Mr. Kroll, have identified a large number
of the key leaders and key rainmakers within their organization and we've
entered into appropriate contracts with them with incentives to ensure their
retention.
Ron Frank - Smith Barney - Analyst
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May I ask what the duration of those arrangements typically is?
Ray Groves - Marsh & McLennan Companies - Chairman of Marsh, Inc.
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Three and four years, respectively.
Ron Frank - Smith Barney - Analyst
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OK, and finally, Sandra, just one more - a request, really. I was
wondering if you could add another slide to the presentation or in some way put
out perhaps a cheat sheet for us with some of the key items of intangibles and
restructuring cost and amortization that are in the assumptions just to help us
with our models.
Sandra Wijnberg - Marsh & McLennan Companies - SVP and CFO
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Yes, we're going to have to do that in some weeks, though, because
we're working right now with the valuation agencies. There are different lives
over which you amortize different kinds of intangibles, so we're working on that
right now.
Ron Frank - Smith Barney - Analyst
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OK, thanks very much for all of that.
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
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Just one further comment on management of Kroll, I'll just reiterate
we are experienced acquirers of professional services businesses, and we are
used to bringing in new talented leaders and making them feel part of the
company over a long term. Our record there is good, and we feel very comfortable
with this team, led by Jules and Mike.
Mike Cherkasky - Kroll - President and CEO
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And if I could just add, we're experienced acquirers, too, and the
process that we've gone through with Marsh has been everything we would have in
fact wanted to do. And I think that we're not going to have an issue going
forward. We just don't anticipate - we've locked up some of the people that are
important. We've got so many other people who in fact we've talked to and I
think are enthusiastic about this deal.
So we just don't anticipate a problem.
Ron Frank - Smith Barney - Analyst
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OK, great. Thanks again.
Operator
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Our next question comes from Vinay Saqi, Morgan Stanley.
Vinay Saqi - Morgan Stanley - Analyst
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Good morning. Just a couple questions. One is if you could just
clarify for us what the organic growth of Kroll has been. It seems as though
there have been a lot of acquisitions over the last two years, and if we can get
a sense of that. Second question is, will you be breaking out the margins for
Kroll separately or the risk management segment separately from the regular
brokerage businesses?
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
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Sandra will answer the second question first and then we'll ask Mike
Cherkasky to answer the organic growth question.
Sandra Wijnberg - Marsh & McLennan Companies - SVP and CFO
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Just like the way in which we report, for example, the reinsurance
business, Vinay, underneath the risk and insurance services segment, we will
report Marsh Risk Consulting and Kroll combined together, but we will just
report the underlying and reported revenue, and then we report the margins for
the entire risk and insurance services segment.
Vinay Saqi - Morgan Stanley - Analyst
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OK.
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
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Mike, do you want to?
Mike Cherkasky - Kroll - President and CEO
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Sure. Last year, Kroll grew over 17% organically. We in fact had
publicly stated that we expected to grow in revenues in the 12% to 15% range
over the next three years. Our first quarter was substantially above that rate
of growth. Over the last three years, almost half of our growth, which has been
- - as Jeff indicated, we've tripled our revenues. Almost half of our growth has
been organic.
So we've had a combined program, which we have every intention of
continuing, which is organic growth and to emphasize organic growth. At the same
time, when appropriate and opportunistically, to continue to do acquisitions.
Vinay Saqi - Morgan Stanley - Analyst
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How sensitive is your business to the economy, if at all?
Mike Cherkasky - Kroll - President and CEO
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We - I think Jeff, again, said it. We have the same philosophy of
trying to make sure we have a mixed portfolio. You will find some of our
businesses which have some sensitivity to employment in the economy, but the
good news is we have other businesses which are counter-cyclical. So we have a -
ask risk managers, we've run our business the same way we advise clients, to be
cyclical, counter-cyclical and neutral business.
Our big litigation business, for instance, in our electronic
discovery, is obviously - people are suing people no matter whether it's a good
economy or a bad economy. So what we've tried to do is be balanced and make sure
that we're deeper in those businesses as that cycle comes into play. And because
we're so international, it also, in fact, mitigates the cyclicality of any one
economy.
Vinay Saqi - Morgan Stanley - Analyst
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All right, thank you.
Operator
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Our next question will come from Tom Cholnoky with Goldman Sachs.
Tom Cholnoky - Goldman Sachs - Analyst
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Yes, good morning. First of all, just a quick comment Jeff and Sandra.
Hopefully, you'll begin to use this forum of discussing or talking to the street
in future quarters with respect to your results. I find this very helpful.
Unidentified Speaker
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Was that your one question, Tom?
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
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That was Mike (inaudible), for the record.
Tom Cholnoky - Goldman Sachs - Analyst
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But we'd also want to have Mike on the call as well.
I guess I'm just a little bit curious once again in terms of how we
should think about this acquisition in terms of ROEs. It seems as though Kroll
obviously did have it looks like lower returns than Marsh overall, and why we
shouldn't look at this as kind of a dilutive acquisition in terms of ROE. And
maybe, Sandra, if you could walk that through, or am I missing something?
Sandra Wijnberg - Marsh & McLennan Companies - SVP and CFO
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What you're missing is that you have a company as Mike Cherkasky just
said that has done a lot of acquisitions, so you take on a lot of goodwill. And
as you correctly, I think, pointed out in your research report, the return on
tangible equity is a lot different than the return on book equity, right?
Tom Cholnoky - Goldman Sachs - Analyst
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Correct.
Sandra Wijnberg - Marsh & McLennan Companies - SVP and CFO
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I think you have that in your report there. Marsh & McLennan, on the
other hand, hasn't done any materially large acquisitions for a number of years,
so our return on equity is more at a steady state than theirs is. I think you
have to look through the goodwill that they've taken on to grow their business.
They have a good track record of doing acquisitions that are accretive
immediately. And from an ROE perspective, we think that this is a business that
long-term is just like ours.
Tom Cholnoky - Goldman Sachs - Analyst
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OK, but I shouldn't look at goodwill as invested capital?
Sandra Wijnberg - Marsh & McLennan Companies - SVP and CFO
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Return on invested capital is different than return on equity, but I'm
happy offline to walk you through how we think about it.
Tom Cholnoky - Goldman Sachs - Analyst
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OK, all right, terrific. I am only going to ask one question.
Sandra Wijnberg - Marsh & McLennan Companies - SVP and CFO
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If you want to talk about conference calls, we're happy to. It is
something that as all of you know on the call, or most of you know on the call,
we've talked about for quite some time. We are going to start doing earnings
conference calls beginning with the second quarter.
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
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And Mike Bishoff (ph) will also participate.
Operator
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And we'll go to our next question from Jeff Kessler with Lehman
Brothers.
Jeff Kessler - Lehman Brothers - Analyst
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Thank you. And congratulations, Mike and Jules. I'm really sorry to
lose you guys. A quick question on any conflicts. And that is, does Kroll
represent any competitors to MMC right now, and what happens if you do?
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
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Just let me answer that. The obvious answer is that occasionally we
will and do. What we've done is we've gone through their client list and our
client list. We've looked at the significant clients that are meaningful to
Kroll and where there might be issues, and we've found very, very small amounts
of issues. And the issues, in comparison to what we think are the opportunities
and the synergies is so far outweighed, Jeff, that it is not particularly
troublesome.
So, any time you put organizations together - any acquisition we do,
one of the things we're doing is calculating the synergies and taking off those
things that are non-synergistic or in fact will in fact not be able to be
continued and come out with an equation. This one is so - is wildly in the
positive side, Jeff.
Jeff Kessler - Lehman Brothers - Analyst
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OK, thanks a lot, and again, congratulations.
Operator
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Going next to John Balkind with Fox-Pitt Kelton.
John Balkind - Fox-Pitt Kelton - Analyst
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Good morning, everyone. Just want to touch base on the revenue
dynamics of the company. I didn't get a chance to look at the Kroll numbers in
the first quarter in a lot of detail, but could you talk about where the
incremental growth is coming form across the four segments in the first quarter,
and then the rest of the year, and obviously you have a couple of businesses
that will be under pressure due to the economic or interest rate environment,
and the differences in geography in terms of where the growth is coming from,
because it's a pretty high growth rate that you're shooting for over time.
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
- --------------------------------------------------------------------------
Mike, do you want to answer that?
Mike Cherkasky - Kroll - President and CEO
- -------------------------------------------
Sure. Of our four sectors, three of those sectors had very substantial
growth rates, and we're talking substantial, double-digit growth, both quarter
to quarter and certainly year to year, with the growth rates being in the 100%
level for a year-to-year growth rate for our technology business, and almost 80%
quarter to quarter in our screening business, for instance. And that little bit
because the fourth quarter is a little seasonal.
We expect to continue to have those very strong performances as our
businesses - we get incremental revenue in our scaling business and our margin
is produced and as we do more effective cross working with businesses that
continue to be integrated into Kroll as fairly recent acquisitions.
The one issue that we've had over the last year is a slowing of our -
it's only in relative terms, of our bankruptcy restructuring business. That had
a drop-off in domestically in the United States of something under 10% from a
year ago in the first quarter. We expect that business to flatten for '04.
We are getting signs that actually it may tick up a little bit in '05
because of some of the industry-specific as opposed to broad economic issues.
But that is, in fact, even in that business is counterbalanced by what was a 20%
quarter-to-quarter growth rate in our European restructuring business.
So for us it's very, very strong first quarter, and a continuation of
10 quarters in a row for Kroll where we've had those kind of fundamental growth
rates, which we absolutely had expected to continue as a standalone, and we are
very confident that what we expected to do will actually be multiplied, being
inside of the relationships and the business of Marsh.
John Balkind - Fox-Pitt Kelton - Analyst
- -----------------------------------------
Great. Thank you very much.
Operator
- --------
Our next question comes from Dave Sheusi with J.P. Morgan.
Dave Sheusi - J.P. Morgan - Analyst
- ------------------------------------
Yes, hey, good morning everyone. Can you hear me?
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
- --------------------------------------------------------------------------
We hear you fine.
Dave Sheusi - J.P. Morgan - Analyst
- ------------------------------------
Oh, good. Just a couple of questions around the structure of the deal.
First, just wanted to get a sense of whether there was a collar surrounding the
ultimate purchase price of the deal until ultimate closure. Is there a range
where MMC would walk away, or is that part of the discussion, and then as of the
purchase price, what was the percent of the earn out, and I guess how long is
that earn-out? I didn't pick that up.
Sandra Wijnberg - Marsh & McLennan Companies - SVP and CFO
- -----------------------------------------------------------
OK, it's a cash - all-cash deal, so no collar applies.
Dave Sheusi - J.P. Morgan - Analyst
- ------------------------------------
OK.
Sandra Wijnberg - Marsh & McLennan Companies - SVP and CFO
- -----------------------------------------------------------
So the purchase price is $37 a share. And the earn-outs will all be
disclosed in the proxy that's filed - I believe - I'm just looking at the
General Counsel. I believe as with the earn-outs will all be disclosed in the
proxy.
Dave Sheusi - J.P. Morgan - Analyst
- ------------------------------------
Great, congratulations.
Sandra Wijnberg - Marsh & McLennan Companies - SVP and CFO
- -----------------------------------------------------------
Thank you.
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
- --------------------------------------------------------------------------
Thank you.
Dave Sheusi - J.P. Morgan - Analyst
- ------------------------------------
Thank you.
Operator
- --------
And just a reminder for everyone on the phone lines. Star, one at this
time if you would like to signal for a question.
We'll go next to Jeff Thompson, KBW, Incorporated.
Jeff Thompson - KBW - Analyst
- ------------------------------
Thanks. All my good questions have been asked, but I would follow up
on one that Ron Frank asked on key personnel. It's noted in the 10-K of Kroll
that three people, Cooper, France (ph) and I think it was Lobiando (ph) are key
to the business, and I believe it's the corporate restructuring business. Are
they on board for the next three to four years?
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
- --------------------------------------------------------------------------
Mike, would you like to answer this?
Mike Cherkasky - Kroll - President and CEO
- -------------------------------------------
Sure. They've signed extensions of their contracts, an additional 18
months of contracts so that now we have, from the date of - from May 18th, I
think it's four years, plus a tail of two years non-compete. So they're on
board. They're very enthusiastic. I talked to Steve Cooper last night after the
deal. I think he wasn't quite as happy as Jules - it was Jules' birthday
yesterday, but was really enthusiastic, because he sees the natural power of the
relationships and the extensions of his business by being a part of a really
great risk-consulting organization that Marsh and MMC is.
So we talked extensively to the group already. We have had - people
are always looking, where do I fit in? But certainly the leadership is excited
and looking forward to many happy years inside of Kroll-Marsh.
Jeff Thompson - KBW - Analyst
- ------------------------------
Great, thank you.
Operator
- --------
Next up is Kevin Martin (ph), Credit Suisse First Boston.
Kevin Martin - Credit Suisse First Boston - Analyst
- ----------------------------------------------------
Yes, hello. Can you provide more information on the background about
what led to this transaction, and was it - what are the other opportunities you
looked at?
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
- --------------------------------------------------------------------------
Well, Kroll is a unique company, and we didn't do a screen of all of
Kroll's competitors because there isn't another Kroll organization. But we do
know the field pretty well and know what the competitive set looks like. But it
was - the background was that I placed a call to Jules, who I've known for a
number of years, and suggested that we might want to consider a possible
business combination if they were ever interested.
He thought about it for a few weeks, called me back. This was earlier
this year. Our organizations began talking, and as we began to continue to see
that a fit could be very good for our clients and employees and shareholders,
discussions intensified. So that's the background.
Kevin Martin - Credit Suisse First Boston - Analyst
- ----------------------------------------------------
So there wasn't any competing offers on the table from other...
Sandra Wijnberg - Marsh & McLennan Companies - SVP and CFO
- -----------------------------------------------------------
For Kroll, he means.
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
- --------------------------------------------------------------------------
Oh, for Kroll. Well, I'd leave that for Mike or Jules to answer.
Mike Cherkasky - Kroll - President and CEO
- -------------------------------------------
The brief answer is that our board obviously went through the
processes of consideration, the appropriate processes. And at the end of the
day, because of the uniqueness of what we saw here and the value that in fact we
were being offered, and with advice of obviously counsel and bankers, maybe too
many bankers, made the determination that this was something that really we
didn't think we could duplicate for our shareholders and obviously move forward
with this deal.
Kevin Martin - Credit Suisse First Boston - Analyst
- ----------------------------------------------------
OK, can you also provide more details in terms of approvals apart from
shareholder and HSR (ph). Was anything else requiring approval? And also, just
some more deals on this earn-out.
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
- --------------------------------------------------------------------------
Well, we're not aware of any other approvals that are required, as we
have stated in the press release, and the details of the earn-out will be
provided in the proxy.
Kevin Martin - Credit Suisse First Boston - Analyst
- ----------------------------------------------------
OK, thanks very much.
Operator
- --------
We'll now go to Tom Barr (ph), Lundbern Harden (ph).
Eric Goldsman - Lundbern Harden - Analyst
- ------------------------------------------
Hi, this is Eric Goldsman (ph) with Tom Barr (ph). Sandra, this is a
question with respect to the profitability. You had mentioned that the target
would be getting into the mid 20s. Could you talk a little bit about that, just
in terms of how that might come, given I guess maybe
the nature of Kroll's profitability and maybe some of the ways that Kroll's
profitability and Marsh Mac's profitability will come together to become a
little more accretive?
Sandra Wijnberg - Marsh & McLennan Companies - SVP and CFO
- -----------------------------------------------------------
Well, a big item that we'll lay out for you in more detail as we
understand it a lot better is the fact that the amortization of intangibles and
integration costs is very heavily in the early years. That's point one.
Point two is, if you've been a student of Kroll's businesses, you'll
see that the businesses that are the most rapidly growing are also getting the
benefits of scale. And so they are naturally - their organic margins are
expanding as well. And so we are bringing them in at a time in which their
margins just naturally are expanding.
Thirdly, we see a lot of efficiencies, not just in initial cost saves,
but also putting them on our platforms in terms of driving their profitability
closer to ours. And, obviously, leveraging our distribution, the Marsh
distribution, which reduces the cost of client acquisitions, if you think about
that.
You don't get paid for marketing time, you get paid for doing things.
Unidentified Speaker
- --------------------
Just to reiterate and to make sure you understand, Kroll expects to
come out of this year at a run rate of 19.5, which is a couple of points above
last year, and in fact it's said publicly that we expect to be closely 20% by
'06. And when you take into account the things that Sandra says, we think that
the mid 20s is something that possibly couldn't be achieved by Kroll standalone,
but certainly can be done inside of this organization.
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
- --------------------------------------------------------------------------
Roger Egan is going to add one more element to that.
Roger Egan - Marsh & McLennan Companies - President of Marsh, Inc.
- -------------------------------------------------------------------
I'd just like to add that Marsh has a very powerful distribution
network. We're talking about a global network of over 400 offices. We're talking
about 38,000 colleagues. We're talking about thousands of client executives, and
this will be available to all of the Kroll risk practices and will just be a
great positive to offering these services to a broad array of clients.
Eric Goldsman - Lundbern Harden - Analyst
- ------------------------------------------
All right, great. Thank you all. That was very helpful.
Operator
- --------
We'll now go to Bill Warmington with SunTrust Robinson Humphrey.
Bill Warmington - SunTrust Robinson Humphrey - Analyst
- -------------------------------------------------------
Good morning, everyone, and congratulations on the acquisition. I
wanted to see if I could re-ask that last question a little differently and
asking that, given the level of margin improvement that you're looking to
achieve, the question is, how do you do that, given that you have the U.S.
restructuring business for Kroll, which has been the highest-margin business
looking at a pretty significant deceleration from over the next couple of years.
And, also included in the '04 numbers are about $20 million worth of
one-time success fees that carry about an 85% operating margin in it.
Unidentified Speaker
- --------------------
I think, Bill, that we've set out that we expect margin to come down
in our restructuring business. And we would expect that the successes next year
will continue - however continue to be between 15% and 20%. So it's - there is
some pressure in the margin there. We, in our own standalone projections, had
certainly understood it and said that we were going to get into the 20s.
I think you've seen an enormous shift by Kroll over the last year from
a business that had roughly 65% of our operating profit in the first quarter of
last year was from our CARG (ph) operations to this quarter, first quarter of
'04, roughly 33% was from CARG (ph). So you've seen the shift occur already. I
think it has had some impact on our margin, as has large revenues that are not
very productive in Iraq because of certain startup and pass through.
I think you'll see that all become normalized, and we're confident
that, as Sandra said, our incremental revenues that are going into our scalable
businesses. And as Roger says, the ability to sell through a whole host - I
don't want to call it an army, but a host of people who have relationships, we
are quite confident that that's going to allow us to move those margins into the
mid 20s in short order.
Bill Warmington - SunTrust Robinson Humphrey - Analyst
- -------------------------------------------------------
Well, thank you, and again, congratulations on the acquisition.
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
- --------------------------------------------------------------------------
Thank you.
Operator
- --------
And due to time constraints, we'll cover two more questions before
turning the call back over to the speakers.
We'll go next to Tom Walsh, Lehman Brothers.
Tom Walsh - Lehman Brothers - Analyst
- --------------------------------------
Hey, guys, good morning. Just wondering if you could elaborate a
little more on the breakdown between cash and incremental debt in the
transaction and where that might be
taking your financial leverage? And I think you'd mentioned your coverage ratios
would be coming back in line fairly quickly. I was wondering what promises you
might have made to the rating agencies, or at least your own corporate goals.
Sandra Wijnberg - Marsh & McLennan Companies - SVP and CFO
- -----------------------------------------------------------
OK, the combination of debt and cash, really, is something that we'll
determine as we get a little bit closer to the end of the year - or to the
closing of the transaction. The way we presented it to the rating agencies right
now is all debt.
So from the perspective of talking to them, we've been very
conservative about those assumptions. When we talk about getting our ratios back
in line, we're talking about a whole host of ratios, including EBITDA coverage,
retained cash flow to total debt, as well as debt to total capital.
If you take the one that is the easiest one for everybody to
calculate, which is debt to total capital, it gets back to where we are today
within a year.
Tom Walsh - Lehman Brothers - Analyst
- --------------------------------------
Great.
Sandra Wijnberg - Marsh & McLennan Companies - SVP and CFO
- -----------------------------------------------------------
Does that answer your question?
Tom Walsh - Lehman Brothers - Analyst
- --------------------------------------
Yes, thank you very much.
Sandra Wijnberg - Marsh & McLennan Companies - SVP and CFO
- -----------------------------------------------------------
The other ratios correct faster.
Tom Walsh - Lehman Brothers - Analyst
- --------------------------------------
Understand. Thank you.
Operator
- --------
And next up is Paul Carter, Wachovia Securities.
Paul Carter - Wachovia Securities - Analyst
- --------------------------------------------
Yes, hi, this is Paul Carter for Mark Markon.
I thought in your prepared remarks you touched on about - you made
some comments around leveraging data, and I think this is in reference to
Corporate Systems and (inaudible), particularly around background vendor and
credit screening. I'm wondering if you can add
any additional color on how this acquisition adds significantly to your
capabilities and where your opportunities in reference to kind of data-driven
risk-management services?
Thank you.
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
- --------------------------------------------------------------------------
Don, do you want to answer that?
Don Birdsong - Marsh & McLennan Companies - Risk Consulting Services
- ---------------------------------------------------------------------
Sure. Over the last five years, Marsh has been growing our presence in
the data management area in risk management services, and as you all are aware,
we acquired recently Corporate Systems, which was going to double our presence
in that business. The addition of the background screening business and the
technology services group of Kroll will have this new company at about 40% of
total revenues in the scalable businesses, all around helping our clients manage
risk, risk processing, and manage information more effectively.
The margins on our business have grown to in excess of 25%, and we see
that continuing into the future.
Paul Carter - Wachovia Securities - Analyst
- --------------------------------------------
Are there any additional services that you'd like to add in that area
that perhaps Kroll kind of gives you a lead into?
Don Birdsong - Marsh & McLennan Companies - Risk Consulting Services
- ---------------------------------------------------------------------
I could probably go on for about an hour in providing you the list of
opportunities that we see in taking the scalable side of the business and
enhancing it for our customers. But to give you one example, you take a look at
the background screening business and the ability to connect to our workforce
strategies group where we deal with worker's compensation issues for our clients
in Mercer, on the human resources side, in Marsh's employee benefits side. A
great opportunity to leverage that side of the business very effectively.
On the Kroll technology services business, which predominantly does
three things - providing data recovery for loss of media, providing electronic
evidence discovery, and also providing computer forensics. Those resources
around Marsh's claim activity on our claims consulting business we think are
going to provide tremendous leverage for our firm as well as tremendous
capability for our clients.
Paul Carter - Wachovia Securities - Analyst
- --------------------------------------------
OK, OK. And just as a point of clarification, what I was trying to get
at is obviously Kroll's into background screening. I'm wondering if there's
other data-type driven screen-
ing processes, such as tenant screening, et cetera, that maybe Kroll or Marsh
will want to move into.
Unidentified Speaker
- --------------------
We already do it. But I think - I agree with Don. It does open up now
a whole series of opportunities because we have the technology to provide data
and analyze that data quickly for Marsh type of clients. The question is, what
do you do with it? We've found some uses. I think we're going to find more as we
continue to talk.
Unidentified Speaker
- --------------------
And the ability to give our clients quicker, faster information around
risk and the decision process of retaining and managing risk is really our goal.
Paul Carter - Wachovia Securities - Analyst
- --------------------------------------------
All right, thank you.
Jeff Greenberg - Marsh & McLennan Companies - Chairman, President and CEO
- --------------------------------------------------------------------------
Well, I hope that through our presentation and through the answers
that we've provided to your questions that you can understand why we are all so
enthusiastic about this transaction. We have two unique firms in high-growth
businesses, a tremendous strategic fit and a cultural fit, which we think is
really going to be great for our clients and our employees and our shareholders.
So thank you for your questions, and we'll obviously be continuing our
conversations with you as you have new questions.
Thanks a lot.
Operator
- --------
Thank you. Once again, everyone, that does conclude today's
teleconference. We do appreciate your participation and you may disconnect at
this time.