With more and more brokers being lured by the advantages and efficiencies of consolidation, mergers and acquisitions have seldom been a hotter topic within the insurance industry.
Combining two discrete businesses is a complicated task and one fraught with pitfalls for the under-prepared. The rewards, however, can be enormous.
Successful mergers can boost the economies of scale of all businesses concerned, reducing the amount of time and staff resources needed to deal with back-office issues, such as compliance, training and human resources management.
Critically, they can drive profitability by exposing brokers and their expertise to new markets, in terms of both geography and risk.
One the most active firms in this area has been Austbrokers. In the 2012-2013 financial year, the cluster group has acquired stakes in 13 broking and financial services business, increasing its holdings by almost a third so far this year. Meanwhile, its underwriting agencies business Austagencies also made two major acquisitions, taking the Austbrokers Group’s total holdings to almost 60.
For Fabian Pasquini, General Manager of Acquisitions and Development at Austbrokers, identifying the right prospect is crucial to a successful acquisition.
“It’s all about the people and the culture,” he says. “It’s making sure that if you buy a business and merge it in with another business the cultures are going to fit. It’s making sure that in that merger there is value that we can add so that the bottom line results are accretive and improve over time.”
When Austbrokers was looking to consolidate their geographical presence nationwide with an acquisition in Tasmania, their pre-existing relationship with BGA Insurance Brokers came to the fore.
“We had known Brett (Wilkinson) and Grant (Butters) at BGA for some years and had a strong relationship with them so it just made sense for us to connect with them and create a platform where we will build and maintain our presence throughout Tasmania,” Pasquini says.
“And we picked BGA as being the right platform as a business strength for us in the future.”
Performing due diligence prior to an acquisition or merger is crucial to the future success of the venture. This includes investigating and managing risks, meeting regulatory requirements and working with each party to ensure the union has longevity and strong financial viability. With the Austbrokers network rapidly expanding stringent systems have been put in place to ensure acquisitions are beneficial to both parties.
“We have a process in place from the beginning where we approach a prospect right through to when we sign the documents and transition them through to joining Austbrokers,” Pasquini says.
“Whether that’s one of our Austbroker partner businesses or as a standalone business at Austbrokers Holdings we have an induction process; we introduce our IT team, compliance, business services et cetera, to ensure the people have got the processes in place that they need to have for the future.”
A further step in the due diligence process for some large-scale mergers involves gaining the non-opposition of the ACCC. This was the case for the merger of Macquarie Premium Funding and GE Pacific Premium Funding in March, which only proceeded after the regulator was satisfied it was not likely to substantially lessen competition.
The merger has resulted in Macquarie Premium Funding becoming Australia’s second largest premium funder, increasing its client base by 21%.
Stuart White, former CEO of GE Pacific Premium Funding and current CEO of the combined entity says: “Macquarie had been a formidable competitor for a number of years and when the opportunity came up to discuss a potential joint venture we did our research and found strategically our businesses were a good fit.”
Former Macquarie Premium Funding CEO Gary Seymour has taken on a consultative role, assisting White with the transition.
White says, “The board early on established how they wanted the transition to take place. Gary and I were earmarked to work together pre-completion to ready both me and the business for transition and that to date has gone seamlessly and it’s been a very positive experience from my perspective.”
Partnering with success
There is no one-size-fits-all approach to mergers. Austbrokers, whose model has traditionally been seen as based on the purchase of 50% stakes, says their processes are often individually tailored.
Austbrokers’ Pasquini gives the example of PB Broking, purchased in December.
“The principal Ian Yeo was wanting to scale back, concentrate on his corporate clients and he had a large book on SME clients and staff servicing those clients and he wanted those people to be looked after,” he says.
“We tailored a deal where he took the corporate clients and went through one of our big businesses, Strathearn, and the SME business and the staff that service that business went to MGA under a portfolio management model that MGA deliver.
It was a real win-win: a win for us, a win for Ian, a win for Strathearn, a win for MGA.”
Financial elements aside, the successful merging of two corporate entities are reliant upon the relationships built between the organisations. Cultural fit and open lines of communication are integral to sustaining a productive and positive partnership.
BJS Insurance Brokers CEO Bill de Vos says managing the principals’ expectation of business value can make all the difference.
“Knowing when to walk away is as important as making the acquisition itself,” he says. “It takes a combination of experience and business sense to end negotiations without burning bridges. Doing so successfully can preserve your business and save the target’s time.”
By keeping clients and staff front-of-mind principals and directors are more likely to experience a smoother transition process.
Takes place between two companies within the same business sector to increase their market presence and create synergy. This type of merger is epitomised by Macquarie Premium Funding’s relationship with Pacific Premium Funding.
When one party buys enough shares within a company to take control of the entity. This occurred in June when Austbrokers bought a 77.1% shareholding in InterRISK Australia.
An acquisition is the takeover of ownership of one company by another. In 2011 insurer QBE purchased the Australian operation of CUNA Mutual Group.
Case study – BJS Insurance Group
BJS commenced operations in 1998, when it purchased a small insurance brokerage portfolio in Cowes, Philip Island. Since then, it has acquired eight other brokerages, from Adelaide to Brisbane.
CEO Bill de Vos says their key focus when appraising possible acquisitions is the potential for business growth.
“BJS scrutinizes the past three years’ trading results,” he says. “From this we structure a model in terms of how the purchased portfolio will perform given that BJS will apply economies of scale, including savings on back-office functions, compliance, rent, training, insurance and insurer consolidation,” de Vos says.
BJS also examines a client’s ranking, which determines the business’s dependence on certain income streams. They also endeavour to determine the vulnerability of major accounts. Over time BJS has consolidated the shareholding in all purchased businesses into a 100% ownership model.
To ensure all acquisitions are profitable, BJS applies a template that ensures the business has the potential to produce a minimum required return. If the required price of a potential acquisition won’t allow BJS to achieve such return, the business is not purchased. This strict policy has resulted in multiple successful expansions, and fuelled plans to make further acquisitions, particularly in Western Australia and New South Wales.
Case study – Milne Alexander
Keeping it personal
Sydney-based Milne Alexander celebrated its 40th anniversary this year and amongst the speeches and celebratory champagnes, the family brokerage took a moment to recognise the contributions of the late Vendor Principal of West Coast Insurance Brokers Kevin Wiebrecht. Milne Alexander CEO Darren Milne says the company’s first acquisition has set the tone for its planned acquisitions in the future.
Milne says much of the acquisition’s success was due to Wiebrecht’s full and ongoing support throughout the integration.
“There was inherent trust between my father (John Milne) and Kevin and whilst we did have extensive legal documentation, following a review of the arrangements by Kevin’s lawyer, settlement proceeded effortlessly,” Milne says.
Since that time Milne Alexander has made six additional acquisitions with plans to further expand.
“We can generally tailor an integration structure to suit anyone – as long as it satisfies our minimum criteria. We are flexible regarding the available options and are happy to discuss any possibilities ranging from an outright purchase, to a combination of cash and shares going forward,” Milne Says.
Ultimately however, the brokerage aims to keep a strong people focus at the core of its acquisitions.
“With our own staff numbers increasing over the years, we have found that developing and maintaining a high performing culture is the most important element to any business success,” Milne says.