Acquisition Acumen

By Brad Unger

TIME KILLS ALL DEALS

Don’t skip due diligence—but don’t let a deal drag on forever

I get it—you’re a busy person. You work hard all day serving your clients, managing your staff and selling new business. And when you’re done with your regular job, you just want to do something fun: spend time with family, pursue your hobbies, volunteer at a place you’re passionate about or just sit on the couch with the dog and watch TV.

An acquisition can tend to feel like a huge investment of time, dragging on forever. But if you’re going to pursue a deal, we believe it is far better to tear off the Band Aid™ and get the deal done quickly and efficiently. Time kills deals in three distinct ways: moving targets on financial and due diligence aspects; management distraction; and deal fatigue. These problems need to be mitigated by implementing an efficient process to analyze, negotiate and execute a deal.

Before we address the need to get deals done efficiently, we want to make it clear that this does not give you license to shortcut the important task of understanding your target. Acquiring a firm can have great strategic and financial benefits, but a bad deal (or a good deal done badly) can cause much more harm than good.

[I]f you’re going to pursue a deal, we believe it is far better to tear off the Band Aid™ and get the deal done quickly and efficiently.

There is good reason to conduct careful due diligence and make sure that you fully understand what you are buying, and you must thoughtfully consider the valuation and negotiation of key terms and legal documents. In no way should our advocacy of the need for speed be construed as condoning poor work anywhere in the process. Having the right team—a group of experienced profession-als—can get the job done in a timely manner without compromising the work.

Moving targets

Both buyers and sellers can suffer from the consequences of moving targets when a deal drags on forever. As time passes, revenue and earnings often change, and so do market pricing levels. In many ways, this issue affects each side equally, meaning that an extended time frame benefits no one. For example, the seller could win a large piece of new business or lose a major 20-year account. Two issues arise when a transaction is delayed.

First, it simply takes more time to continually reevaluate the deal after each change. Teams get into a vicious cycle where time presents changes, which in turn take more time to analyze, and that extra time brings more change … then rinse and repeat.

The second issue is more complex and relates to prospect theory in behavioral finance, and specifically the concept of anchoring (see the 2002 Nobel Prize in Economics). A won or lost account is easily adjusted for in a pro forma financial statement, and with pricing based on multiples, the change can be fair and transparent. A valuation change, however, is rarely good in terms of optics or psychology. Sellers have a dollar number in mind based on the initial letter of intent—a reference point or an anchor—and if that number decreases for any reason, even because of their own actions, human nature is such that they often become less likely to do a deal, despite the fact that it’s still a fair price. It may not be rational, but it could scuttle your deal.

Executing a transaction takes a tremendous amount of work on the part of many staff members. It’s difficult for leaders to still do their “day job” while focusing on the details and decisions required around closing a deal. Allowing a deal to drag on could interfere with the routine management of a business unit and eventually could cause a failure to meet core goals.

While transactions often are cool and fun, they can eventually become a drag. Over time, buyers and sellers may forget the details of what they discussed or agreed to months earlier; and if they’re not on the same page now, they may re-litigate the issues in a contentious manner.

People in deal mode often find themselves feeling somewhat adversarial toward the other side, despite the fact that the best possible outcome is a long and profitable working relationship going forward. Each party should look out for itself during the deal, but the goal is to get to the stage where the two groups become one. Dragging out a deal, especially if the situation becomes adversarial, can poison the potential for a successful transaction.

The thoughtful use of a financial advisory team, including attorneys, is worth considering when pursuing a deal. Financial advisors can navigate the issues and keep both sides of the transaction on schedule. They also can assist in valuation, integration planning and due diligence of financial items that require both an experienced eye and a significant level of manpower.

Hiring an experienced transaction attorney often results in fewer billable hours and a cleaner deal because these experts are able to focus on the key issues and deprioritize the immaterial red herrings.

Planning is an important step for buyers and sellers to complete a transaction in a timely and efficient manner. The project plan should prioritize key execution items and include a clear delegation of responsibilities and deadlines for staff members.

To be both comprehensive and efficient, the buyer’s internal team can handle items of key strategic significance (e.g., do we understand the products they sell?) and outsource tasks where the team lacks expertise or time. The project team needs a leader to ensure that everyone remains on task and to make the critical decisions that are necessary to keep the process moving forward.

The author

Brad Unger joined Marsh, Berry & Co., Inc. (MarshBerry), in 2015 as a vice president on the mergers and acquisitions team. He also is involved with the firm’s financial consulting business. MarshBerry helps agents, brokers and carriers as they work to maximize their value by providing industry-specific services. Contact Brad at Brad.Unger@MarshBerry.com or (440) 220-5435.

Securities offered through MarshBerry Capital, Inc., member FINRA and SIPC, and an affiliate of Marsh, Berry & Company, Inc., 28601 Chagrin Blvd., Suite 400, Woodmere, OH 44122; (440) 354-3230.

MARKET UPDATE

Insurance broker-age merger and acquisition activity in March produced 37 announced transactions, and with several retroactive announcements, the first quarter total stands at 161 announced transactions. If the first quarter of 2019 is any indication as to the appetite of the market, we are on pace for another record-setting year. Some 30% more transactions were announced in the first quarter of 2019 than for the same period in 2018, and this has been the most active quarter in the last decade.

Patriot Growth Insurance Services, LLC, was the most active acquirer with 19 announced transactions year to date, although it did not announce a transaction in March. The next most active acquirers were Hub International Limited with 10 announced transactions in the quarter, followed closely by BroadStreet Partners, Inc., Arthur J. Gallagher & Co., and Acrisure, LLC, with nine announced transactions each.

Marsh & McLennan Companies, Inc., completed its acquisition of Jardine Lloyd Thompson Group plc, which it had announced in September 2018, while Marsh & McLennan Agency announced the acquisition of Lovitt & Touché Inc. With locations in Phoenix, Tucson, and Las Vegas, Lovitt & Touché was previously ranked 77th on the 2018 Business Insurance list of the 100 largest brokers of U.S. business.

Another trend in the market has been an increased attraction to direct-to-consumer insurance products. Willis Towers Watson PLC has agreed to acquire Tranzact. This $1.2 billion investment will bolster Willis’s direct-to-consumer offerings and presents a growth opportunity.

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. Statistics for 2019 are preliminary and may change in future publications. Please feel free to send any announcements to M&A@MarshBerry.com.

Source: S&P Global Market Intelligence; other publicly available sources and MarshBerry Opinion & Experience. Securities offered through MarshBerry Capital, Inc., Member FINRA and SIPC, and an affiliate of Marsh, Berry & Co., Inc.