Management Turnover as Change Agent

Wednesday, September 17, 2008

AIG Forced to Take On New CEO After Gov't Takeover (Loan)

As the shock waves continue to reverberate through Wall Street the mighty continue to fall.  The latest to get walking papers was short term AIG CEO Robert Willumstad (see earlier blog).  After the government's $85 billion loan (buyout, takeover, dismantling ) Secretary of the Treasury Henry Paulson informed Willumstad he would be replaced.  Paulson has selected Edward Liddy, a former CEO of Allstate and currently a partner in the private equity firm of Clayton, Dubilier & Rice to become AIG's CEO.  According to a story by James Miller of the Chicago Tribune,
Liddy, who formally joined the private-equity firm Clayton, Dubilier & Rice as a partner only four months ago, will succeed Robert Willumstad, according to reports in The Wall Street Journal, Financial Times and Bloomberg news service.
The articles, citing unnamed sources, said the government had demanded the departure of Willumstad -- who moved into the top spot at AIG in June after his predecessor was forced out because of the insurance giant's deepening mortgage-related problems -- as a requirement of the Fed's $85 billion bailout plan.

Under that plan the Fed agreed to lend $85 billion to AIG, allowing the company to avoid filing for bankruptcy protection, in exchange for warrants that will provide Uncle Sam with an 80 percent stake in the privately owned company.
Liddy is known by Paulson.  Liddy has been on Goldman's board since 2003.   He is known as no-nonsense executive.  According to BNET,
... Liddy has a reputation for shaking things up within the managerial ranks. Shortly after becoming Allstate CEO, Liddy swept away many longtime managers, often veterans who had been with the insurer since it was part of Sears Roebuck, and quickly assembled his own team.

Liddy also overhauled the Allstate agency network by turning many fulltime insurance agents into company contractors, cutting many agents’ compensation. To this day, Liddy is scorned by those Allstate agents.

Moreover, Liddy has shown he can make money in times of great adversity. In 2005, when Hurricane Katrina cost nearly $3 billion in Allstate claims, the company made over $1 billion.
Even with all his previous experience it is difficult to assess how he will fare in his new unprecedented position at the top of AIG which is now controlled by the United States government.  According to a Reuters story in the Guardian by Bill Rigby,
He (Liddy) got the nod to run AIG late on Tuesday, as part of an $85 billion Federal Reserve-sponsored bailout -- which effectively makes the New York insurer government property -- with a mandate to sell off what parts he can.

"He (Liddy) is a very experienced and seasoned professional in the insurance industry," said Larry Coats, a co-manager of the Oak Value Fund, which has in the past invested in large capitalization insurance stocks.

"There's obviously much work to do at AIG, but he has significant experience and would appear to be up to the task," he added. Coats' fund, based in Durham, North Carolina, does not currently hold AIG or Allstate shares.
While at Allstate he slashed costs and employees. According to Rigby's article,
... he helped the company through the after-effects of the 1994 Northridge earthquake, the 2001 World Trade Center attack, and several hurricanes including Katrina in 2005, all of which cost insurers many billions of dollars in claims.

He is not afraid of making unpopular decisions. While in charge at Allstate, he forced the painful transition of many Allstate agents into freelance contracts, and slashed 10 percent of its non-agent staff in a bid to cut costs.

Under Liddy, Allstate made its first real steps away from being an old-line insurer dependent on face-to-face policy sales, to a sleeker, modern company using cheaper telephone and Internet sales channels.
His task at AIG is far more complex and he will find himself under far more pressure from a number of different directions.  Job number one is protecting the taxpayers' money.  After that the real question remains whether he sells off the entire company in pieces or manages to find some formula to keep parts of it functioning?  According to the,
(Liddy) may not be staying on for the long term at the embattled insurer; and could return to Clayton, Dubilier & Rice Inc., the private equity firm where he is currently an operating partner.

A representative of CD&R source close to the situation told The Deal that the buyout shop "expects that this will be an interim role and that Ed will return to the firm when he fulfills his responsibility to AIG."
I do not envy him.  Let's hope he does a yeoman's job.  

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