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Article
M&A Back on the Agenda: Not Just Growth – Survival
By
Steve Discher
Executive Vice President
With a few exceptions, there has been a relatively modest level of mergers and acquisitions (M&A) in the U.S. insurance market over the past several years–certainly not the flurry of activity seen in the 1980s and '90s. This has been driven by three key factors. First, insurer profitability has been very strong for most. For example, the P&C industry has enjoyed record profits the last several years in spite of large catastrophes and a softening market. Second, strong carrier balance sheets have played a role. P&C and Life businesses experienced increases in surplus and solid investment returns. This, combined with strong management of the bottom line, has resulted in continually strong capital for the industry. Finally, with a few exceptions, there has been no compelling reason for carriers to either sell or buy for over the past several years. When earnings are growing (or at least not shrinking) in a soft market, there are few compelling reasons to over-pay for a potential acquisition or consider merging if solid earnings and surplus are being sustained.
Now, a 5000+ point drop in the Dow has changed the game. Investments are worth far less right now and carriers are going to struggle much more than they have in the recent past. For that reason, mergers and acquisitions are quickly moving up on the executive agenda–not just as a way to grow, but as a way to survive.
For those carriers who are quickly being thrown into the deep end of the M&A pool, we have a few suggestions and lessons learned from our long history of advising clients in evaluating, selecting, and implementing merger and acquisition opportunities. These include:
 | When evaluating potential opportunities, stick with your core business. Many carriers have excess liquidity even now and are likely to consider "portfolio plays." That's fine for businesses that are already successfully operating a portfolio of companies. For those who do not, be wary of venturing into uncharted territories. Those may include lines of business which require dramatically different understanding of risk, underwriting, claims, or distribution. Experimenting with diversification can be a good thing, but take a carefully measured approach in deciding how much you are willing to put at risk.
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| Prepare to move quickly. Many of your peers and competitors are reviewing the same opportunities. Those who can act quickly, accurately, and decisively will win. Those who over-analyze M&A options may find themselves watching opportunities pass them by–especially now that liquidity is so important to survival.
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| Don't be afraid to give serious consideration to businesses with seemingly unattractive operations. Operations which are not up to your standards are often the greatest opportunities for performance and profit improvement. |
| Be thorough in your due diligence. The need to act quickly can also lead to overlooking key reviews. This is not limited to just deal evaluation but also final terms and conditions. |
| Leverage your strong cash position if you can. Especially with today's market conditions, going to the capital markets for funding will slow you down and you may end up ceding returns which would otherwise be better passed on to current shareholders.
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| Consider IT integration issues carefully before, during, and after the deal. Before a deal can be struck, accurate and timely financial, HR, and operational data is needed. IT compatibility and dependency issues can slow business integration efforts and possibly reduce longer-term integration benefits. |
| Line up the right team to execute with speed and precision. Integration is hard work and requires experienced resources to realize the benefits expected from a merger or acquisition. |
| Finally, don't underestimate the challenges of cultural integration.
There is substantial evidence which points to why mergers and
acquisitions fail. The #1 reason most noted is the failure to
integrate company cultures. Analytically speaking, you can pick the
best target but if you don't have the right end-state culture you
won't integrate and the projected benefits will not materialize as
expected.
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These are a few of the key issues you should consider as today's market dynamics put M&A back in play. And these aren't just hypothetical. These are the very issues we are helping our clients work through right now as they pursue merger and acquisition opportunities. The need for speed blended with diligence is critical right now. I welcome the opportunity to discuss these key issues with you as you confront them. Please e-mail me at
steve_discher@renolan.com or give me a call at 800–248–3742.
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