News
Mergers & Acquisitions - room for optimism - 2010-05-24
Deals are picking up markedly in 2010, but there remains more caution and brokers seeking to acquire need to take a savvy approach.
Merger and aquisition business within the broking sector is undoubtedly recovering. Much of 2009 is best forgotten. The financial crisis knocked confidence and the credit crunch made funding far harder to obtain - but for those intermediaries with the necessary ability, prospects are bright.
Certainly the corporate finance team from Littlejohn has been pounding the streets since Q3 2009 speaking to private equity funders, banks and brokers about their appetite for investment into the broking sector. And as a result, our view, based on the views received, is that the insurance broker M&A is due to significantly increase in the year ahead and on into 2011.
During the prolonged period of inactivity, it has been clear that private equity funds have not been spending. But those funds are sitting on large piles of cash and need to spend it - wisely. Some are now though and we are starting to see more deals emerging across all sectors. We have spoken to circa 15 funds and all have shown interest in the sector and are open for business.
Scale
There is generally a veiw that brokers. certainly those operating in the London market, need to be a certain scale - say £10million of GWP - to be really profitable and operationally efficient.
This is not necessarily the case and there are certinaly lots of smaller brokers who are ready to acquire and the 'buy and build' strategy is accepted as a way to get past the £10million mark. There are a number of provincial and smaller London market brokers and some of these have owners that are looking to pass on the baton.
In some cases those business have no natural succession plans in place. In other cases, the next tier of management can see that they may well need to team up with other firms to grow - as such, there are signs that the family business ethos and old school grudges between firms might disappear.
Along with taking a far more open approach to acquisitions, a new breed of broker is clearly emerging. For example, there is a general consensus that there can be a lot of cost shaving done and there is a willingness to invest in new technology. Forward-looking brokers may also adopt a movement from immediate bonus culture to equity participation and share in future exit proceedings.
Clearly there is one key advantage in buying now if funding is availalble - broker valuations are coming down. Broker owners seem to be a bit more realistic about valuations which is brining a little value back to the table.
The big high street banks have pulled back from many sectors, and while broking may still have its attractions, things are moving slowly.
In many cases, private funds are providing debt themselves. This change in approach may mean that more deals are done because elusive bank debt is not required. This said, it appears that debt is available to funds that have good realtionships with the banks.
Lessons
So, in summary, while the banking sector remains attractive, some lessons from the heady days of M&A activity and as a result of the financial crisis have been learnt. These are that in particular brokers need to be in the best possible shape before looking to make an acquisition. This means filling any skills gaps rapidly to build a complete management team.
They also need sound plans in place to show that business growth is going to be a reality. Simply going for business as usual is not an option - no broker who is serious about M&A activity can rely on brokerage fees and add-ons to bring in profit. It is no surprise that many of the brokers who are performing best focus on high growth markets and niche product areas, in addition to showing they can secure sources of new income.
And, post acquisition, experience has shown that only those brokers who ensure there is speedy and complete integration of new businesses will be in a postion to show they can make the grade - and be ready for further expansion.
John Needham is a partner in Littlejohn's Financial Services division. He can be contacted by telephone on 020 7516 2284, or by email.
This article was first published in Insurance Brokers' Monthly, May 2010.
