A&A takes steps to boost profits

June 08, 1994|By Timothy J. Mullaney and Joel Obermayer | Timothy J. Mullaney and Joel Obermayer,Sun Staff Writers Bloomberg Business News contributed to this article.

Alexander & Alexander Services Inc. said yesterday that it would slash its dividend and sell $200 million worth of preferred stock to American International Group Inc. of New York in an effort to help the insurance brokerage and consulting firm bounce back from years of sagging profits.

The company also announced that Frank G. Zarb, vice chairman of New York-based insurance giant Travelers Inc. and former head of brokerage firm Smith Barney, would become chairman, president and chief executive.

The moves aim to turn around a company that has had to restate its earnings, deal with dwindling revenue and a potential downgrade, reorganize a key division and attempt to replace its chief executive -- all since November. Standard & Poor's Corp. said last Wednesday that it was considering lowering the rating on Alexander & Alexander's debt, and yesterday, Fitch Investor's Service said it might lower the company's commercial paper rating.

Yesterday's statements had been much anticipated, following a day in which trading in A&A stock was suspended pending an announcement by the board, which met throughout Monday.

Alexander & Alexander first said yesterday morning that it would cut its quarterly dividend to 2.5 cents a share from 25 cents, saving the company about $9.8 million a quarter, and that it agreed to sell the preferred stock to AIG.

Then, minutes before the market closed, the company said it was hiring Mr. Zarb, an investment banker who, until February, had been touted as a possible Republican candidate for governor of New York.

The company's stock rose $1.50 yesterday to close at $17.875 a share.

A&A, officially based in New York, has all but the top 10 or 15 administrative officers in the company working out of a satellite headquarters near the Owings Mills Town Center mall.

The company employs about 750 people in Owings Mills and at sales and consulting offices in Owings Mills and Baltimore and is one of the top 40 employers in Baltimore County, officials said.

Providing risk management and insurance services, specialized insurance brokering and management consulting services, it is the second-biggest insurance broker in the world, trailing only Marsh & McLennan Cos. of New York.

"In January, we promised dramatic action to improve operations and earnings," said Alexander & Alexander Chairman Robert Boni. "Today's steps constitute an important installment on that promise."

Company spokesman Gary Sullivan said the AIG investment would lead to "organizational changes" in its U.S. insurance brokerage business. But he said that layoffs, while they could not be ruled out, were not a key element of the company's plans.

"At the moment, I don't see a direct impact" on local jobs, Mr. Sullivan said. "I would certainly say the principal thrust will be to invest in information technology. "

Mr. Sullivan said the company would invest the $200 million in service improvements and would use some money to buy insurance against possible losses stemming from a discontinued insurance underwriting division. The company will seek shareholder approval for the sale of stock at a special meeting.

By hiring Mr Zarb, 59, Alexander & Alexander has gotten a seasoned decision-maker who has turned around struggling operations before, but has little experience in the insurance brokerage industry.

Mr. Zarb served as the senior official for all U.S. government energy-related activities in the Ford administration and later spent 10 years as a partner at New York investment banking firm Lazard Freres & Co.

In 1988, Sanford I. Weill, chief executive of Travelers Inc., asked him to run Smith Barney.

The chief executive position had been open since April, when Tinsley H. Irvin, 60, who also served as chairman, resigned to allow improvements in earnings and operations.

But a remaining question is whether Mr. Zarb has the stature to make a series of tough decisions that will be needed if the company is to return to profitability.

"You need someone to really come in and clean house, the company hasn't made money in a long time, Alexander and Alexander has a major turnaround to do and you need the right player to do it," said one analyst, who declined to be named. "It's hard to say if he's the one."

Wall Street liked what it heard yesterday, at least at first blush, said Alex. Brown Inc. analyst Ira Malis.

"The dividend cut was obviously expected," he said. "Most people expected it to be smaller, but the size of the capital infusion and who the party was is clearly unexpected. AIG is the premier insurance firm in the world," he said.

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