Ending a two-year battle to turn around a sinking company with only mixed success, Alexander & Alexander Services Inc. said yesterday that it has agreed to be acquired by Chicago-based Aon Corp. in a deal valued at $1.23 billion.
Alexander & Alexander is a New York-based brokerage firm for commercial insurance but has a large office in Baltimore, and all but its most senior administrative personnel are based in Owings Mills. It employs about 670 people in metropolitan Baltimore.
Under yesterday's deal, Aon will pay $17.50 in cash for each share of Alexander & Alexander common stock, or about $790 million. American International Group Inc. will get $317.5 million for its preferred stock in Alexander & Alexander, which it bought for $200 million in 1994 as part of a plan to recapitalize A&A.; Aon will pay $120 million to cash out other preferred-stock holders.
Aon provides insurance and consulting services. Last year, it had revenues of $4.466 billion and net income of $402.8 million. Its shares closed yesterday at $58.875, up $1.25.
Aon officials were not available for comment yesterday and plan a news conference today. But analysts expect that the merger could mean job cuts, especially in administrative operations at Alexander & Alexander.
"Some of the expense savings will come from reduced staffing, no doubt about it," said Merrill Lynch & Co. analyst Jay Cohen.
Alexander & Alexander spokesman Gary Sullivan said, however, that no consideration had yet been given to job cuts in the Baltimore area. And Lars Thomas, who works in software support operations in Owings Mills, said the mood of his colleagues was fairly upbeat. "In the end, you have one bigger, stronger company," he said.
The sale is part of a strong consolidation trend in Alexander & Alexander's key businesses, commercial insurance brokerage and corporate risk management consulting. Driven by falling insurance prices and profit margins, mergers increasingly are winnowing the industry down to a handful of very large players whose size lets them cut administrative costs to the bone.
"Not surprised at all," said Cathy Seifert, an equity analyst with Standard & Poor's Corp. in New York. Chairman Frank G. Zarb "was brought into Alexander & Alexander [in 1994] to turn it around, and the unwritten message was always to turn it around and sell it."
Alexander & Alexander officials admitted yesterday that they had, in the end, been unable to cut costs enough to do more JTC than just stabilize the company. And industry trends were especially tough on A&A; because it was short on capital, company executives and analysts agreed.
They said the stiff competition that always heats up in the insurance business when the stock market is good, as insurers bid down the price of coverage in an effort to get their hands on more investment capital, lowered prices so much that even a series of layoffs beginning in 1994 was not enough.
"We had the base cleaned up and the foundation in place, but rebuilding the franchise became more and more difficult," Zarb said in a conference call yesterday. "You have to run twice as fast to stay in the same place."
The cleanup job Zarb faced upon his arrival was imposing. The company had been staggered for more than a decade by insurance underwriting losses at a British subsidiary, and in 1993 fired five executives and was forced to restate its earnings for the prior 2 1/2 years because its consulting unit had failed to establish proper reserves for uncollectible bills.
But earnings stayed weak and Zarb's solutions failed to raise Alexander & Alexander's stock price, which closed at $17.875 the day Zarb's appointment was announced in 1994 and $17.125 yesterday, up $3 for the day.
Pub Date: 12/12/96