PUBLISHED ARTICLES

Market Temperature: Frigid

Leader's Edge, June 2008
Author: Audra M. Szollosy
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Where, oh where, have all the deals gone?

In like a lion and out like a lamb. I'm not talking about March weather patterns, but about how this year began and where we were at the end of April with insurance brokerage M&A activity. The number of announced transactions in April (13) was down 66% compared to January (38). Year-to-date transactions were down 17% year-over-year. Have buyers run for the hills? Have sellers nothing left to sell?

What a difference a day makes, or in this case, a few months. Record high transaction prices were all the rage a short time ago. Fast forward to the present: A seller who wants (or demands) the previously unforeseen premium agency valuation may be looked upon as having just spoken a new language, with a new dialect, from a new country…or planet! There is no doubt that the housing market collapse, the credit crunch, and the soft insurance market have had a dramatic impact on M&A activity. Some buyers and some sellers are finding themselves at a standoff. On the one hand, some buyers have lowered their valuation multiples to something a bit more palatable to their cash account, credit line, board of directors, or shareholders. On the other hand, there remains the seller who wants to sell at the top and believes the agency is worth every penny of it.

The supply of high-quality opportunities is plentiful, and some acquirers are ready and able to capitalize on these opportunities. Two such broker acquirers are Arthur J. Gallagher and Brown & Brown. Both have 10 deals through April. National Financial Partners is right behind them with eight. Although the banks are not buying in droves, those committed to insurance brokerage are making statements. In April, BB&T acquired UnionBanc Insurance Services from Union Bank of California. The incongruity of one bank getting out of insurance brokerage and another expanding its insurance brokerage is something to ponder. Not only is BB&T expanding its already $800+ million insurance operation by acquiring the 31st largest insurance brokerage, but it's expanding its vast California and West Coast presence—a move sure to put pressure on the regional competition.

One buyer segment that is nowhere to be seen is private equity groups. No private equity group has put money to work in insurance distribution since Allied Capital invested in Higginbotham in August 2007. Despite insurance distribution not being as sexy as dot com's, private equity held fast to its belief that it could get its required rate of return from the consistent and less-risky cash flow of insurance distribution. Perhaps it could have if the mortgage meltdown and credit crunch didn't occur, which forced the cost of debt up. Private equity groups won't lower their required returns by much, if at all, so they will lower their pricing. With that, the new, in vogue pricing comes full circle, and parties are back to the fork in the road and the buyer/seller standoff.

For the most part, the demand and premium pricing for the high-quality, high-performing agency will continue albeit from a smaller acquirer base. For those agencies without a clear, definable, action plan and value-added strategy, the laws of supply and demand will lower deal pricing for the mainstream and possibly the number of deals.

Disclosure: Scorecard year-to-date totals may change from month to month should an acquirer contact Hales to request an earlier acquisition be included in the Scorecard that was not publicly announced. As always, Hales welcomes your announcements.

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