By Thomas A. McCoy
Nomatter how much success an agency enjoys, at some point, its owners must decide what to do with their equity in the firm. It's a difficult decision, both from a financial and an emotional standpoint. No matter who ultimately winds up acquiring an agency owner's financial interest, it behooves any current owner to learn as much as possible about potential purchasers well ahead of any intended date of ownership transfer.
With that in mind, over the past five months we asked agency acquisi-tion specialists at three publicly owned brokers--Arthur J. Gallagher & Co.; Hilb Rogal & Hobbs; and USI--about their acquisition strategies and the acquisition market in general.
Warren G. Van Der Voort, corporate vice president at Gallagher (AJG), devotes all of his attention to potential acquisitions and has observed the twists and turns of this market for 20 years. He was with Gallagher when it went public in 1984 with $48 million in revenue. Today, AJG generates $1.3 billion in revenues, and about half that revenue is derived from agencies that Gallagher has acquired.
In those 20 years, Van Der Voort explains, Gallagher's basic approach to agency acquisitions hasn't changed. "We look for partners to leverage everything we do. They could be small, medium or large. They could be niche players or generalists." He characterizes AJG's acquisition targets as agencies that are going to grow, whether they link up with Gallagher or not. Gallagher acquired 11 agencies in 2002 and 14 in 2003.
While it is not hard to imagine that the major brokers or banks have their sights set on some of the bigger independent agencies, Van Der Voort sees real opportunities for successful acquisitions of smaller firms too. "The small or medium-sized agency with unique qualities, such as a $1 million revenue firm that is niche-specific, can present as much an opportunity as a big one that may have problems or issues."
Large or small, for a purchase to work, Van Der Voort believes, each party must enhance the other. He cites alternative market capabilities as one area of Gallagher's strengths that can boost the capabilities of a newly acquired firm.
Van Der Voort is critical of some brokers and banks that he calls "mere consolidators"--purchasing agencies by focusing on numbers, rather than on the inherent value of the organization. "They are buying revenue and earnings, running their acquisitions for profit. The strategy looks good for a year or two, but they wind up destroying the culture they're buying. Our industry is littered with agencies that have been part of these 'cut and carve up' acquisition strategies."
Gallagher sometimes begins the road to acquisition via a joint venture relationship with an agency. "A small broker may come to us needing help with a construction wrap-up, which we can do for them on a 50-50 revenue sharing basis. Or they may have a client who needs captive, self-insurance or risk management services that we can provide. These kinds of situations can help us build a relationship."
Prices paid for agencies have risen with the hard market, Van Der Voort points out; but speaking last October, he said, "It's starting to level out. Now is one of the most opportune times (for independent agents) to consider a strategic partnership. Valuations will go down as markets soften."
Van Der Voort says the change in mid-2001 from "pooling of interest" accounting to "purchase-based accounting" has helped facilitate deals. Under purchase-based accounting, often a percentage of the purchase price is tied to an earn out--based on the results achieved by the seller over a few years.
Edward J. Bowler, senior vice president, corporate development, at USI, agrees that prices being paid in the open market for agencies are tied to fluctuations in insurance prices. "Although prices today are higher than they were a few years ago, they are about the same as a multiple of revenues or EBITA," (earnings before interest, taxation and amortization) he says.
USI, which has been around for only 10 years, has clearly defined goals for its agency acquisitions, which are listed on its Web site. One of those goals is to acquire agencies each year that produce revenues equal to at least 10% of USI's total revenues from the prior year. It met that target in 2003, acquiring firms with approximately $25 million in revenues. (It quickly added another $25 million in revenues a few days into 2004 when it announced an acquisition--subject to approvals--of Dodge, Warren & Peters of Los Angeles.)
Unlike Gallagher, USI targets only retail agencies--no wholesalers or reinsurance brokers. Its current mix of business is a 50-50 split between property/casualty and life/health. "We want to stay at that level," says Bowler.
USI seeks to buy agencies only in areas of the United States where it already has a presence. "The local USI office must sign off on an acquisition within its territory," explains Bowler, a strategy which he says produces less risk and a better return.
In addition to its expanding network of purchased agencies, USI maintains a few joint ventures with other financial institutions. One of these is with J.P. Morgan Chase, primarily in the New York City area, where the bank refers business to USI.
Hilb Rogal & Hobbs (HRH) has acquired more than 200 agencies since the mid-1980s. One of its acquisitions--the Atlanta-based Hobbs Group, LLC, acquired in 2002--was so significant that it resulted in HRH's changing its name, from its previous Hilb, Rogal & Hamilton.
"As part of our strategic plan we try to make new acquisitions each year amounting to 5% to 10% of our revenues from the prior year," says Tim Korman, executive vice president of HRH. In 2003, the company made six acquisitions totaling approximately $45 million in revenues.
"Our acquisition targets are determined by the talents and capabilities within a particular agency," explains Korman, "rather than the desire to be in a specific geographic territory." However, once HRH is committed to a territory, "we want to be the number one, two or three agency in that area."
Martin L. Vaughan, III, president and CEO of HRH, notes that although it's natural to look for a cycle of activity in agency transactions, "The sale of an agency is an individual decision and can happen at any time, depending on the perpetuation and retirement concerns of the agency owner. Smart sellers don't wait until they're ready to retire. They start planning the process five or ten years earlier."
Vaughan adds that from a financial standpoint, a significant development for sellers recently has been the reduction in capital gains taxes, enacted during 2003, from 20% to 15%.
It's no secret that the entry of banks into the ranks of agency purchasers has had an upward effect on agency prices. Agency consultant MarshBerry has brokered 130 deals over the past four years, including 84 where banks were the purchasers. John Wepler, executive vice president of MarshBerry, says that when a bank buys a "foundation" agency, arguably it can justify paying more than would a public broker that already has the insurance management structure in place.
So far, he says, "Our figures show that over the last two years, 88% of the banks that acquired agencies have met or exceeded their target growth rates for those agencies. They projected growth of 7.2% in the acquisition model and actually achieved 14.2%.
"But in a flat rate environment, that 14.2% would translate to a 5.9% growth rate," Wepler continues. "So the question in the future will be whether the organic production of agencies acquired by banks will be sufficient to make their acquisitions successful outside the kind of hard market we've been experiencing." *
For more information
Arthur J. Gallagher & Co.
Web site: www.ajg.com
USI Holdings Corporation
Web site: www.usi.biz
Hilb Rogal & Hobbs
Web site: www.hrh.com
MarshBerry
Web site: www.marshberry.com