What is the primary reason for the sharp decline in net income this quarter?

The primary reason for the sharp decline in net income to $21 million from $357 million in the third quarter of 2004 is a significant charge of $232 million related to market services agreements at Marsh, coupled with a $132 million decrease in market services revenue. Additionally, regulatory settlements and legal issues at Putnam Investments contributed to the downturn.

What are the implications of the New York Attorney General's investigation and the subsequent business model changes at Marsh?

The investigation has led to the permanent elimination of market services agreements and similar arrangements, which were a significant source of revenue. MMC is implementing a new business model focused on complete fee transparency with clients and a centralized placement process. This transition is expected to negatively impact near-term revenue and operating income, and the company is working to renegotiate credit facilities due to current liquidity concerns and credit rating downgrades.

What is the status of the legal and regulatory issues at Putnam Investments?

Putnam has reached agreements in principle to settle investigations by the SEC and Massachusetts regulators related to brokerage practices and market timing. These settlements involve significant financial penalties and disgorgement payments totaling tens of millions of dollars. Multiple civil class-action lawsuits related to market timing and late trading are also ongoing.

How has the acquisition of Kroll Inc. impacted the company's financial position?

The acquisition of Kroll Inc. for $1.9 billion in July 2004 significantly expanded MMC's risk consulting and advisory capabilities. However, it also substantially increased the company's goodwill on the balance sheet and required significant funding, initially through commercial paper, impacting the company's liquidity and debt structure.

MRSH/MMC 10-Q Quarterly Report Q3 FY2004 — Revenue, Net Income, EPS

Summary

Marsh & McLennan Companies, Inc. (MMC) reported a significant decline in net income for the third quarter of 2004, primarily driven by a substantial charge related to market services agreements and ongoing legal and regulatory issues. For the three months ended September 30, 2004, net income was $21 million, a sharp decrease from $357 million in the same period of 2003. Revenue saw a modest increase to $2.97 billion, but operating income plummeted by 78% to $128 million due to a $232 million charge related to market services agreements and a $132 million decrease in market services revenue. The company is undergoing significant business model changes in its Marsh segment in response to an investigation by the New York Attorney General, including the permanent elimination of market services agreements. This, combined with settlements and ongoing litigation at Putnam Investments, creates considerable uncertainty. Despite the quarterly downturn, the nine-month period ending September 30, 2004, showed a net income of $856 million, down from $1.165 billion in the prior year. The company acquired Kroll Inc. for $1.9 billion in July 2004, which broadened its risk consulting capabilities, but also significantly increased goodwill on the balance sheet. The company's liquidity is currently impacted by its inability to access commercial paper markets, necessitating reliance on credit facilities, and its credit ratings have been downgraded. Investors should closely monitor the resolution of legal and regulatory matters and the execution of the new business model, particularly at Marsh.

Key Highlights

1Third-quarter net income significantly declined to $21 million from $357 million in the prior year, largely due to a $232 million charge related to market services agreements.
2Operating income fell 78% to $128 million in the third quarter, driven by a substantial drop in market services revenue and ongoing regulatory issues at Putnam Investments.
3The company acquired Kroll Inc. for $1.9 billion in July 2004, significantly increasing goodwill and expanding its risk consulting services.
4MMC is implementing significant business model changes in its Marsh segment, including the permanent elimination of market services agreements, in response to investigations and lawsuits.
5Putnam Investments settled with the SEC and Massachusetts regulators for $40 million and $50 million respectively, related to brokerage practices and market timing issues.
6The company is experiencing liquidity constraints, including an inability to access commercial paper markets, and has had its credit ratings downgraded.
7Despite challenges, consulting revenue showed underlying growth in both the quarter and year-to-date periods.

MARSH & MCLENNAN COMPANIES, INC. Quarterly Report for Q3 Ended Sep 30, 2004

Summary

Key Highlights

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