June 5, 2006
Insurance agencies contemplating a
merger or acquisition should employ a
"tactical approach" to identifying
takeover targets, determining in advance
the potential of a proposed deal and
whether the combination would fill gaps
in their organizations.
Agencies looking at a potential target
should also do so from the perspective
of whether the proposed deal would help
put their organizations where they want
to be in three-to-five years.
These prescriptions for success in
building an agency through mergers and
acquisitions was outlined by Steven
Wevodau, managing principal and an M&A
specialist at Harrisburg, Pa.-based WFG
Capital Advisers, during a seminar here
on "Mergers & Acquisitions & Other
Strategic Alternatives to Maximize
Shareholder Value." The seminar was
hosted by WFG and The National
Underwriter Company-parent company of
this newsmagazine.
Paul Mattaini,
a partner with the law firm Barley
Snyder LLC, with offices throughout
central Pennsylvania, cautioned that
based on his experience, merger
"transactions seem to be more difficult
to get done over the past five years."
He cited two main reasons why an
acquisition fails to live up to
expectations:
* First, there is a tendency to "do the
deal, then do nothing," he said,
describing situations where the acquirer
doesn't make full use of the
acquisition.
* Second, there is what he termed
"acquirer arrogance"-in which the buyer
acquires a successful outfit, then
changes how it operates so it will fit
into the new organization.
He also said that both buyers and
sellers often perceive potential deals
inappropriately. Buyers, he warned, can
go into negotiations with unrealistic
expectations, especially regarding time.
"It always takes longer than people
think [to do a deal]. It is a process."
On the other hand, many sellers expect
to get their asking price paid on
closing day and walk away. "That's
wonderful, but I can tell you it doesn't
happen very often," he said.
"It can be a very emotional process" to
sell a business-especially if it was
owned by a parent or grandparent, he
advised.
Moreover, the amount of time it takes to
put a sale together can actually have an
effect on the transaction, he noted.
"People get so into the process that the
underlying business starts to
underperform,"
according to Mr.
Mattaini, who
added that such a development "almost
certainly can have an effect" on the
ultimate price that is paid.
He also mentioned the "cultural aspect"
of a transaction-using the example of
banks, which have a different structure
than insurance agencies and may not be
comfortable with a producer making more
than executives or the looser
scheduling, he noted. "You have to step
back and say, 'Is this the same deal
that I thought it would be?'" Mr.
Mattaini
said.
He also emphasized due diligence, saying
it's "often not done early enough or
thoroughly enough." He said buyers
should be careful about committing to
anything until they've looked
comprehensively at the target's internal
affairs.
Mr. Mattaini
warned that sellers, as well as buyers,
need to conduct due diligence and to
consider the question of when they
should reveal all to the buyer. "There's
no great answer" to the question of when
a seller should "open up the whole
cabinet," he said.
Whenever due diligence occurs, he warned
sellers, they should have
confidentiality agreements to protect
their business and trade secrets. "Make
sure you have one, and make sure you've
had someone look at it" to guarantee it
provides the right protection if the
deal ultimately falls through, he said.
Mr. Wevodau agreed, urging sellers to
conduct what he called "reverse due
diligence" to, among other issues,
ensure that the buyer can actually make
the transaction happen.
Amid other advice offered at the
seminar, sellers were told to contact
people who made deals with the potential
acquirer to see how their experience
played out, while also examining how the
acquiring firm plans to operate the
business being sold. Specifically,
sellers were urged to find out how the
new owner intends to maintain
relationships with clients and carriers
at the acquired firm.
One question a seller should ask,
according to Mr. Wevodau, is whether the
buyer intends to re-brand immediately,
which could cause confusion for clients.
This is especially important in cases
where the purchaser gets an "earn
out"-which pays them more if the company
performs up to certain standards after
it is acquired.
In general, Mr. Wevodau said his firm
takes a "systemic approach" to examining
potential acquisitions for clients.
He stressed the serious nature of
looking at the usual financial
exposures-concentration risk, loss
experience, shock loss and the
relationship with carriers-and the
potential effect a deal could have on
the acquired firm's contingency
compensation agreements.
Integration, however, is "the biggest
hurdle people just don't think about,"
Mr. Wevodau said. There are some
important issues in terms of technology,
for example-what platform the acquired
firm uses, and whether it is compatible
with the one being used by the
acquisition target.
Additionally, there are concerns about
what he called a "culture clash"
following a merger, explaining that
people who are "unwilling to understand"
what combining companies means can be a
"deal breaker."
Additionally, he said the "expectations
of sellers are huge" at times, causing
increasing difficulty in closing a deal.
Of course, culture clash can also
undermine deals with smaller transition
problems, especially if it involves
issues such as vacation time or
personnel, as people are absorbed into a
larger firm. "We've had people willing
to walk away because they didn't get a
personal secretary," Mr. Wevodau noted.
Once such issues are identified,
agencies move onto the "second date"
phase of an acquisition, as the company
sizes up the ultimate value of a deal,
Mr. Wevodau said.
"You really need to have an
understanding of the overall value of
the business," he said, meaning that
there is more to an agency than simply
the bottom line. "It's not an exact
science," he said. "Our business is
riddled with goodwill and intangibles."
