Don’t Discount the Touchy-Feely Side of M&A

On paper, a business can look like an ideal acquisition opportunity. The numbers are there and indicate consistent growth. 

The balance sheet is fairly clean, and margins are above average. Leadership has been in place for a long time, which has to mean something, right? On paper, this business appears to be a virtual M&A dream.

Except, there’s something that just doesn’t feel right. While the quality of a business is absolutely critical when reviewing it for acquisition, there’s a factor you should always remember, and it’s not black and white.

Culture Tips the Scales

Culture means more than you think in the M&A world, where the focus often turns toward performance and numbers. Without a cultural fit, it may be more difficult to integrate the business into your company. When the culture does not align with your own, there’s bound to be some internal struggle both for the buyer and the seller.

It is important to understand that value is measured beyond the figures on a financial statement. (Don’t get me wrong, that’s important—but it’s not everything.) Who an organization is and what it cares about ultimately will help determine its long-term success. Buyers view this as an integral part of their holistic evaluation. Risk is measured by the ease of integration and ultimately the firm’s ability to perform within its environment.

Culture is a tough thing to get your arms around because it’s not literal like the numbers. There’s a lot of gray area with culture—defining it, understanding it, improving it. We have seen that leading firms are culturally self-aware in the sense that they have a strong identity. They know who they are and what they stand for. Their people share the same vision, mission and beliefs. They’re working together to achieve the same goals. The resulting synergy helps positively impact the numbers.

In fact, we believe you cannot have consistent organic growth at above-market averages in a competitive environment without a strong culture.

Of course, top-line performance is meaningful. But in our experience, firms can command higher valuations when they have a strong culture. While buyers want to see revenue and growth, demonstrated leadership can be even more valuable. That includes how leaders engage with their teams and with their communities.

That’s why agencies should do some soul searching. Who are you, really? What makes you and your team tick? Do you have a stated mission, vision and company values that drive your leadership? You can reinforce these beliefs through demonstrated behaviors such as:

• Hiring, training, mentoring and developing the next generation of leaders—investing in your people for personal and professional growth
• Encouraging and supporting active involvement in the community
• Making decisions about the firm that constantly refer back to and support the values and belief statements
• Empowering department leaders and others to make positive change
• Focusing on a performance-based culture with accountability coming from all levels.

Culture is something you feel—it connects employees and attracts clients. It binds together an organization so it can grow through the good times and the bad. Everything can be right about a firm, but if the culture is wrong, then there’s just not a match.

Market Update

Insurance brokerage deal activity increased in May to 29 announced mergers and acquisitions, up from 21 announced last month. Activity this year continues to lag behind last year, however, with 162 deals announced in 2016 as of May 31, compared to 192 announcements to that point in 2015. Arthur J. Gallagher & Co. (AJG) and Confie Seguros were the most active buyers in May, both announcing three transactions. AssuredPartners continues to lead all buyers, with 14 deals announced so far in 2016 (AJG is just behind at 13, followed by Hub International at 11).

Despite the softer numbers overall, wholesale targets have been represented in 14 of the 162 announcements so far this year, already greater than the 11 wholesalers that were purchased in all of 2015.

Notably in May, Prime Risk Partners, a brokerage backed by private equity firm Thomas H. Lee Partners, announced its second strategic acquisition—the planned purchase of Old National Insurance, a large Midwestern multiline agency formerly owned by Old National Bank. The transaction was expected to close in June.

Also during May, NFP announced its first acquisition outside the U.S., Puerto Rico and Canada. NFP acquired on March 31 Linkfield Corporate Solutions, a p-c brokerage based in the U.K.