A&A; head could get $20 million


Alexander & Alexander Services Inc. could be forced to pay new Chairman Frank G. Zarb as much as $20 million if management's revival plan fails to win shareholder approval.

Earlier this month A&A; unveiled a plan that called for it to sell $200 million worth of preferred stock -- equivalent to a 21 percent stake in the company -- to American International Group Inc. of New York and also said it would slash its dividend by 90 percent. At that time it announced it had hired Mr. Zarb as its new chief.

The buyout terms, revealed by A&A; in a preliminary proxy statement filed with the Securities and Exchange Commission, would give the former vice chairman of Travelers Inc. $12 million in cash, if the AIG deal or a "substantially comparable equity investment" is not approved by Oct. 31.

The rest of the buyout would come from immediate vesting of Mr. Zarb's right to as many as 271,307 shares of stock in the company., If he stays, the restricted stock grant given to Mr. Zarb when he was hired earlier this month will not vest until 1996.

The proposal underscores how badly A&A; needs the credibility that Mr. Zarb can bring to the restructuring of a company that has staggered through the last several years. A&A; has most of its operations at Owings Mills, but it is headquartered in New York.

Former chief executive Tinsley H. Irvin announced his departure in January, in what was described as a mutual decision with the company's directors, after several years of admittedly unacceptable financial performance.

"We need to remember that he [Mr. Zarb] was next to the top at Travelers," said Robert Boni, chairman of Alexander & Alexander's executive committee, who led the search for a new chief executive. "He was giving up an assured position at The Travelers that was highly compensated. It was important, in the unlikely event that the company was unable to raise capital, to compensate him for the career" Mr. Zarb gave up when he left the much larger financial services company.

Mr. Zarb made $832,083 in salary and $2.1 million in bonus pay at Travelers in 1993. He also exercised stock options that brought him a $12.7 million gain. At the end of the year, he had remaining options to buy about 750,000 shares. The options he was granted in 1993 alone were worth $5.4 million at that time, but most became worthless with his departure.

His compensation at Alexander & Alexander has not yet been disclosed, company spokesman Gary Sullivan said.

Shareholders are to vote on the AIG investment July 15, according to the draft proxy. Dr. Boni said his conversations with institutional investors, who own the majority of the stock, make him confident the proposal will be approved. If it is, the $12 million will not be paid.

Providing risk management and insurance services, specialized insurance brokering and management consulting services, Alexander & Alexander is the second or third-biggest insurance broker in the world, depending on what survey is used.

The company employs about 650 people in Owings Mills and at sales and consulting offices in Owings Mills and Baltimore, and it is one of the top 40 employers in Baltimore County, officials said.

Major shareholders of Alexander & Alexander have not immediately reacted to the disclosure of Mr. Zarb's contract. Three of the company's five biggest stockholders, all institutions, declined to comment.

A&A; also disclosed that it had received proposals to be taken over, as well as to take over other companies, after Mr. Irvin announced his departure in January. But the company said it "expressed no interest in pursuing these approaches."

Instead, A&A; told its investment bankers to evaluate the fairness of the AIG offer without soliciting other proposals to determine the company's market value.

That disclosure has dismayed some investors, according to one analyst, who asked not to be identified, because the sale of the preferred stock to AIG will dilute short-term earnings per share by about 20 percent, a figure Dr. Boni confirmed. The company is also cutting its common stock dividend by 90 percent.

A takeover would have allowed investors who have lost money in A&A; in recent years to recoup some of their losses quickly. A&A; shares, which closed yesterday at $16.875, traded over $27 last summer and as high as $40 in the mid-1980s.

Investing AIG's $200 million in Alexander & Alexander's insurance brokerage business and buying reinsurance against losses from a discontinued insurance underwriting unit is a riskier proposition that will take much longer to pay off -- if it works, the analyst said.

"It will give them time to address their U.S. retail operation and give them the funds to get it on the right track," said Kristin Howell, an associate director of the insurance rating group at Standard & Poor's Corp. "But it will take time. There are questions about when they will be able to turn it around."

But Dr. Boni said a takeover would not be a cure-all.

"A sale of the company would not have done much for shareholder value" because the current stock price is so low, he said. He said that the proposals did not contain specific terms and that the company feared bidders would low-ball A&A.;

Instead, the company plans to try to rebuild a weak financial base that has caused its bond rating to fall into "junk" categories.

But Ms. Howell said Alexander & Alexander's bond rating is still being reviewed for a possible downgrade by Standard & Poor's. She said the company still has to deal with management problems, especially the integration of a number of smaller firms acquired in the last five years.

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