Economy Cools M&A Enthusiasm

Economy cools M&A enthusiasm; Buyers and sellers exercise more caution in potential deals

SALLY ROBERTS



Uncertainty about the economy, insurance pricing and the political environment, coupled with tight credit markets, have slowed the number of insurance broker mergers and acquisitions so far this year, experts say.

That's in direct contrast to the seller's market of recent years in which strong public broker valuations and abundant debt and equity capital resulted in a record number of deals and soaring agency valuations.

But just because all that has changed hasn't stopped buyers and sellers from talking today, broker M&A experts say. The fundamental drivers of consolidation remain in place—namely a fragmented agent/broker marketplace and the need to build scale.

``Unpredictable'' is the way Atlanta-based Reagan Consulting Inc. described the M&A market in a recent report. ``It doesn't mean that M&A has ceased, and it doesn't mean that all deals are being done at bargain values. But it does mean that buyers and sellers are more deliberate and more cautious today than they were just 12 to 24 months ago, when both sides were eagerly wading into the market. Today, it is more difficult to predict when sellers will market their agencies and where buyer interest will come from when they do.''

Marsh, Berry & Co. Inc. estimates that the number of transactions closing in 2009 will drop about 9% from 2008, which saw an estimated 810 agent/broker deals take place.


``Buyers are having a difficult time coming to terms and conditions (with potential sellers) because they are not only being conservative, they're being selective; and capital and credit are tough to come by, so they've lowered their valuations and sellers are saying to themselves, `I know the inherent value of my business. I'm not selling for a discount,' '' said John Wepler, president of the Willoughby, Ohio-based M&A consulting firm. Right now, ``it's worth more to many sellers to hold than to fold,'' he said.

``There's a lot of dating going on, but not a lot of engagements,'' said Kevin Donoghue, a managing director of Mystic Capital Advisors Group L.L.C. in New York.

Some firms think it might be a good time to sell because of fear that capital gains taxes are going to rise under the Obama administration, he said. But other firms are wondering if they wait a year whether insurance prices will firm and naturally inflate their values, he said.

``The large, active buyers, which set consolidation trends, have definitely grown more cautious and more conservative,'' said Timothy J. Cunningham, a principal with OPTIS Partners L.L.C. in Chicago. ``They can't predict when the economy is going to recover and when the insurance market is going to firm. As such, many are taking the stance that ``no call is the best call'' and it's hard to criticize caution in this environment, he said.

New York-based Marsh & McLennan Agency L.L.C. is one agency with an strong acquisition appetite. The small- to middle-market account unit of broker Marsh Inc. launched earlier this year and now is in the process of finding the right agency platform to give it the foundation it needs to grow.

``From an activity standpoint, I've never seen this type of activity in this short amount of time in people showing a willingness to talk to us and developing an interest in us,'' said David Eslick, who was named chairman of the agency in January.

``We just don't want to make acquisitions for acquisition's sake. We want to find good, quality partners,'' he noted.

In terms of multiples, Mr. Eslick said they are down, ``but nobody should be saying it's a hyperbuyers market and that the values are absolutely at the low end because they're not.''

Strong privately held firms don't have to sell. ``They can continue to run their business. So you've got to give them a compelling reason to do so,'' Mr. Eslick said.

Others say they expect more subdued acquisition activity this year.

``There seems to be about as many opportunities, but we're being very picky,'' said J. Hyatt Brown, nonexecutive chairman of Brown & Brown Inc. in Daytona Beach, Fla. In some cases, potential acquisitions want to get their values back up before they sell. ``A lot of people say, `We're interested, but it's going to be six months or a year,' '' Mr. Brown said.

The pace of acquisitions has dropped off this year for the agency. After completing 45 acquisitions generating about $120 million in annualized revenues in 2008, it's acquired only six properties so far in 2009 with $18 million in total annualized revenues, Mr. Brown said.

``The inventory is as great as it's ever been, but at the moment there's a bit of lull,'' said David Zuercher, chairman, president and chief executive officer of Wells Fargo Insurance Services Inc. in Chicago. He said the broker continually looks for acquisitions, but it tends to be driven by market conditions. WFIS acquired 12 firms in 2008, but only four so far in 2009.


After completing 37 acquisitions in 2008, Arthur J. Gallagher & Co. has slowed its pace this year.

Not only is the broker in the midst of integrating renewal rights acquired from Liberty Mutual and Wausau Signature Agency this year, but the economy also is a factor, said J. Patrick Gallagher Jr., chairman, president and CEO of the Itasca, Ill.-based broker. ``It's a point in time now where it's difficult to just buy and pass results,'' he said. ``So, yes, things are slower, but the pipeline and what we're doing in terms of strategically picking our partners is still moving forward quite nicely,'' Mr. Gallagher said.

Mark A. Hofmann, Zack Phillips and Rodd Zolkos contributed to this report.