Acquisition Acumen
Successful acquisitions depend on a team of experts directed by a strong leader
Ever see a Navy captain skipper an aircraft carrier? The captain declares, “We’re going to Tokyo” and the navigator plots a course, the engine room sets the speed, and the hands at the helm most likely belong to an 18-year-old sailor. All the while, cooks feed the crew, doctors treat the ill, and radar and sonar groups monitor air and sea. When a four-acre U.S. airbase travels across the world, the captain’s thinking ten days ahead, not ten miles.
We believe that a successful acquisition strategy depends on a team directed by a strong leader. The leader cannot act alone; he or she needs to run point and understand the whole process and must commit significant time to acquisition activity. As we’ll discuss below, the team typically consists of staff from the finance, operational and service areas, with key personnel empowered to focus on their areas of expertise.
Leadership
In our experience, the most sophisticated buyers often segregate duties so the leader can originate opportunities and pass them along to other staff members to handle the execution work. The point person does not need to do all the financial analysis, the negotiation of pricing and terms, the due diligence, or preparation of the legal documents. Frankly, it’s better if he or she doesn’t do these things, for the following reasons:
The required detailed work takes time that the leader can better spend on a higher purpose—looking for new opportunities, managing the broad operations of the team and, in the case of many mid-sized firms, doing the day-to-day job of the president or a key producer.
The leader should focus on critical issues—the truly important things that can affect the total organization. This could be a new organizational structure or a new operating model for a specific department. The leader figures out the best way to use the newly acquired talent and knowledge to push the business forward.
Finally, if the deal needs to be killed, the leader might have keener insight to make the tough call, because he or she wasn’t involved in the minutiae.
The leader should set the cadence of the deal—the speed, priority level, and time commitment that team members are expected to give. The leader also must be clear on which decisions are delegated and to whom, and which issues need to be brought to a leadership group for discussion, analysis, and an eventual decision.
The team
Acquisition teams vary in size; the acquisitive national buyers that we often deal with may have a dedicated group of staffers on the merger and acquisition team (plus lawyers, finance staff, and business unit leadership), whereas local or regional buyers may simply have a small group drafted into service and pulled from their regular jobs.
It’s important to have defined representatives in the following key roles:
Origination—Originators need to seek out new deals that meet the stated appetite and get the process started. Often a target may want to understand indicative pricing early in the process, so the originator needs to be prepared with some thoughts that are appropriately noncommittal.
Evaluation, Offer and Negotiation—Another key role is pricing the deal. This person must understand the mechanics of the target business and have a good sense of where this acquired business will fit into the acquiring company. The pro forma financials may include expense synergies for the combined entity or may involve new investments to fix issues in the target company. The person charged with this task must understand these issues when deciding how to price an offer. We often see senior finance staff in these roles.
Due Diligence—Although financial due diligence can be outsourced, and many lenders or investors consider third-party verification a required best practice, several diligence aspects are often completed in house. Legal, human resources, and operational diligence are often best done by the actual staff that will inherit these matters. Even when third-party advisors are used, the controller or finance lead should be involved to make sure that they understand the details of the pro forma operations.
Agreements and Closing—Agreements usually are completed by an outside attorney, and he or she needs to take direction from someone in house, especially with respect to the business and financial terms. Lawyers and investment bankers can advise on many issues, but at the end of the day, the signature on the purchase agreement will belong to a principal of the acquiring organization. That buyer will pay the purchase price and own the business, so it is essential that a senior staff member participates in the negotiation of the documents and the mechanics of closing. Often this role is handled by the same senior financial staff that handled the offer phase described above.
Determine who will participate in deals and who will lead the team. The leader should understand all the issues and be empowered to make most decisions on behalf of the firm. He or she should depend on staffers (and outside advisors) to complete a detailed analysis of each component of the deal, so that he or she can focus on the most critical issues and on the important task of keeping the deal pipeline full.
The author
Brad Unger joined Marsh, Berry & Co.,Inc. (“MarshBerry”) in 2015 as a vice president on the Mergers & Acquisitions (M&A) team. In addition to his M&A advisory responsibilities, Brad also is involved with the firm’s financial consulting business. MarshBerry helps insurance agents, brokers and carriers as they work to maximize their value through a variety of industry-specific services. Contact Brad at Brad.Unger@MarshBerry.com or (440) 220-5435.
Market update
Deal announcements in March 2017 were relatively unchanged from February, although they were down from the previous year. During March, 30 acquisitions were announced compared to 29 in February. In March 2016, 50 deals were announced, nearly 20% more than this year. Year-to-date through March 2017, a total of 102 acquisitions have been announced by buyers, which compares with 124 through March last year.
BroadStreet Partners, Inc., has been the most active acquirer this year, with 11 announcements through March. Arthur J. Gallagher & Company and HUB International Limited are not far behind with nine and seven announcements year to date, respectively. Targets have been largely property and casualty agencies (over 50% of YTD deals), with the remainder weighted to multi-line/full-service agencies, as opposed to benefits-only brokers.
In mid-March, private equity firm Onex Corporation announced its intention to sell USI Insurance Services, LLC, to PE firms KKR & Company L.P. and Caisse de dépôt
et placement du Québec (CDPQ) for a reported $4.3 billion.* Onex purchased USI in December 2012 for $2.3 billion after GS Capital Partners (an affiliate of Goldman, Sachs) had taken USI private in 2007. USI currently generates over $1 billion of annual revenue across over 140 offices.* USI has been an active acquirer in the insurance distribution marketplace, announcing more than 35 deals since Onex took the majority stake in 2012. The deal is expected to close in the second quarter of 2017.*
Securities offered through MarshBerry Capital, Inc., Member FINRA and SIPC, and an affiliate of Marsh, Berry & Company, Inc. Disclosure: All deal count metrics are inclusive of completed deals with U.S. targets only. Scorecard year-to-date totals may change from month to month should an acquirer notify MarshBerry or the public of a prior acquisition. Please feel free to send any announcements to M&A@MarshBerry.com. *Source: S&P Global Market Intelligence and other publicly available sources. MarshBerry Opinion & Experience.