Acquisition Acumen
DO YOU HAVE WHAT IT TAKES?
Managing your M&A strategy is a matter of time
Time is limited. We get what we get—and for the leader of an insurance firm who is considering achieving growth through merger or acquisition, this fact presents a real conundrum.
Acquisition opportunities take time and lots of it. The process can’t be rushed. It requires commitment, resources—and, well, good timing. Timing is everything. Not to mention that acquisition opportunities don’t just show up on your doorstep. Mergers and acquisitions (M&A) require strategic, ongoing attention to constantly fill the pipeline with prospects, grow relationships with owners, and dedicate the time to due diligence and working a deal from inception to close. (Then there’s the transition post-acquisition that also requires time and focus.)
Do you have what it takes?
This is an important question to ask because your time is valuable. The way you spend it leading your firm will directly affect your agency’s success. With today’s dynamic M&A environment—MarshBerry advised on 58 transactions in 2017—there’s a keen interest in M&A among owners who want to achieve growth. There’s new private capital entering the insurance market, and private equity continues to infuse the industry with investment.
Before you try to handle the M&A process in house, consider the value of your time. Spending it wisely can ultimately affect the success of a transaction.
Is a merger or acquisition the answer to growth for your firm? Just as important, if you decide to pursue one, how will you manage the time aspect of the process?
Spending your time
Large international insurance brokers have internal teams that are solely focused on M&A. Acquisition is a core component of their business strategy, and they assign resources that scout prospects. They have people in house who spend all day executing transactions, from sourcing to pricing, due diligence to negotiation, and finally writing and reading and rewriting legal contracts. It takes a range of disciplines and specialties to fill out a robust M&A team, and the major brokers have just that.
What about your firm?
We find that most mid-sized and even large firms do not have dedicated M&A teams. If a merger or acquisition is a key growth strategy for the firm, the CEO and CFO generally dedicate about one third to one half of their time to the task. They’re not all in—they still must oversee the business. So they split their time between M&A responsibilities and ensuring that the core business operates successfully.
This isn’t easy.
If an owner takes his or her eye off the ball of daily operations, what happens? Strong business leaders must be in place to run key departments: personal lines, commercial lines, employee benefits. The administrative team also must be competent and able to provide support so key leaders can step out of the day-to-day to manage M&A.
Can you do it all?
Some strong leadership teams can afford to balance their time between CEO and CFO responsibilities and working on M&A transactions. But many would tell you that the time and due diligence that they call for is more than they can reasonably add to their plates. Remember the time thing—it’s limited, and when I find the way to add a 25th hour to each day I’m going to charge a lot for it.
We’re not just talking about the CEO’s and CFO’s time. During certain aspects of an M&A process, other key leaders are usually involved, and they will spend about 10% to 15% of their time, depending on the stage of the acquisition. Strong leadership is essential; the agency can’t afford to have a weak link because key leaders will need to step away.
What’s the risk of not being fully committed to the business or the M&A process?
You could end up acquiring a business that’s not an ideal fit: You miss red flags, you overlook warning signs that you simply don’t have time to focus on. Then, does the transaction accomplish your goal to grow? Maybe not. You could sacrifice profit and organic growth opportunity by focusing too much on M&A. So even if you do acquire that desirable firm, your growth may not be what you hoped because you still have work to do inside.
The process takes time and knowledge. Managing and growing an agency takes dedication and strategic direction. Most owners find they can’t do all these things, and they should not expect to. So what do we think is the best way to approach M&A?
Own it or outsource it?
We encourage owners to sit down and seriously consider what they can outsource in the M&A process. What responsibilities must be accomplished by you, the owner, and your leadership team? What details and tasks can you offload to free up time to focus on your core business? As you balance your time and plan for future acquisition, get real about how you actually can spend your time.
What to Own. When you’re getting to know a prospect, you must spend time and energy on understanding their culture—getting to know the organization, and the owner, on a personal level. You’re building a relationship, and that’s not easily accomplished by a third party. Despite all the technicalities involved with M&A, merging two organizations is a highly personal transaction. The owners involved need to have that gut feeling that both of their firms will benefit, and they must know that their cultures align. Own this process. Get to know the prospects you’re seriously considering. Post-transaction is no time to have a first date.
The getting-to-know-you aspect of a transaction is something an owner is intimately involved with—but the actual prospecting can be insourced because it requires casting a wide net and constantly fishing. Do you, the owner, have time for that? No, but you need to get someone from your firm to own this and spend considerable time on it.
What to Outsource. A number of technical activities are conducted during the M&A process: pricing, valuation, due diligence, negotiation, structuring a deal, working with financial professionals, and so on. You cannot outsource relationship building—but you can, and frankly we believe you should, outsource these tasks that take a significant amount of time and require certain skills and market data that is usually beyond an owner’s capabilities. Be honest about how your time is best spent so you can grow the organization, fulfill your core mission, and deliver the best possible client experience.
Striking a balance
It’s tempting to jump into the M&A game given the flurry of activity we’ve seen in the past 24 months, and mergers and acquisitions certainly represent a viable growth strategy for some organizations. But doing it right takes time and experience. The international brokers that handle it in house are doing so with rich resources—teams of people who are focused completely on the process.
If you want to play in the market and you are committed to growth through acquisition, now is the time to reevaluate the tasks you are performing and consider outsourcing to create more capacity for yourself as the CEO or CFO. Internally, stop focusing on tasks that others can do, and use that found time on M&A activities that cannot be outsourced, such as relationship building.
If you do achieve a level of M&A activity where you can justify hiring a full-time employee to assume those activities you outsourced, then do that and hire someone with lots of experience. But in the meantime, be mindful of how you spend your time and energy. Understand what it takes to fully execute a transaction. What tasks are you prepared to take on, and what can you outsource to give yourself the breathing room to commit to your role in the M&A process?
In the end, it’s all about how you spend your time. Spend it wisely and you’ll help to maximize the potential of an acquisition.
The author
Brad Unger is a vice president of Marsh, Berry & Company, Inc. You can reach him at (440) 220-5435 or Brad.Unger@MarshBerry.com.
Market Update
As spring wound down, market activity heated up among buyers, as 36 deals were announced in May 2018compared to 31 announcements in April 2018. Although the market appears to be slower than last year, with 168 announced deals year-to-date through May 2018 compared to 230 deals announced over the same period in 2017, several pending transactions of top 100 brokers, along with the expectation that there are more to come, give a sense that the market is as active as ever.
After announcing four deals in May alone, Alera Group, Inc., isnow tied with HUB International Limited with 13 deals announced year-to-date through May 2018. AssuredPartners, Inc., is in second place with 10 announced deals, but followed closely by BroadStreet Partners, Inc., NFP Corp., and Arthur J. Gallagher & Co., which announced nine deals through May 2018.
The Hilb Group (“Hilb”), which announced 14 deals in 2017, announced its first transaction of 2018 with the acquisition of a New York-based P-C agency, Bentson Insurance Group (May 1, 2018). This acquisition bolsters Hilb’s presence in the New York/New Jersey region, making this Hilb’s fifth office in that region and bringing its total office count to 58 across 17 states.
Disclosure: All deal count metrics are inclusive of completed dealswith 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: MarshBerry Proprietary database Prospective for High Performance (PHP); S&P Global Market Intelligence; http://www.insuranceinsider.com/; http://www.insurancejournal.com; http://www.businessinsurance.com/; and other publicly available sources and MarshBerry Opinion & Experience
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