While principals at some excess and surplus lines brokeragesmight believe their primary perpetuation goal is to negotiate thebest prices they can for their shops, successful acquirers saytheir primary focus is making sure the merging cultures mesh.

In interviews with four E&S producers, the executivesexpressed one common view–that a successful partnership must have acultural fit or it will make life miserable for both concerns downthe road.

One wholesaler making its first acquisition this year wasMercator Risk Services in New York. Formed in 2006, Mercator shiedaway from the idea of growing through acquisition because it is sodifficult to find the right partner to grow the business, saidChris Treanor, president and chief executive officer.

“Our growth strategy was inherently organic for a couple ofreasons,” he explained. “I was always skeptical of acquisitionbecause I'm very focused on culture and I was always worried thatwith an acquisition it is very difficult to find an organizationthat is sufficiently similar to your own.”

He said he feared an acquisition could have the opposite effectof growth, instead diminishing the organization he and hiscolleagues were trying to build.

In some key areas, however, an acquisition makes sense–to fillin a niche or provide a product that would take another 20 years tobuild. It simply saves a lot of time and effort, he noted.

Such was the case when Mercator acquired Tennant Risk ServicesInsurance Agency of Hartford in February.

The deal provided two points to which Mercator aspired, notedMr. Treanor:

o Tennant's core business is professional liability, “which theyare very good at,” providing access to expertise in an areaMercator wanted to enter, he said.

o Tennant is good at small transactions–those under $10,000 inpremium–something alien to Mercator, which concentrates on largertransactions of $100,000 or more.

What Mercator is learning from Tennant is efficiency through theuse of technology and how to produce business at a lower cost, hesaid. What Tennant gets is a platform to grow. “It was reallyperfect timing for the both of us,” said Mr. Treanor.

The two are still in the “honeymoon” phase, but no substantiveissues over integration have arisen. “The way we view the world isvery similar,” Mr. Treanor said.

Risk Placement Services, the wholesale division for Itasca,Ill.-based insurance broker Arthur J. Gallagher, began operationsback in 1997 with four people, according to RPS President JoelCavaness. Over the years it has grown to 860 people through thecombination of organic growth and mergers, with 20 mergers underits belt in the past eight years.

All those mergers were successful and he cited two reasons forthat result from both a financial and cultural fit standpoint. Mr.Cavaness said his view is that these partnerships will not be forshort-term gain, but for the long-term horizon. “I personally willbe involved with them for the next 15 years,” he added.

More important, he said, is getting to know the people, andunderstanding if their views of the wholesale business are the sameas those of RPS. “You have to get to know the people because it isall about the people,” he said. “We do a heavy amount of duediligence and urge them to do the same. There are extensiveintegration discussions. [Both parties] do not like surprises.

The strategy for RPS is not to do a deal where there will beoverlap and merging of organizations. Instead, the firm looks forsmall agencies where there is minimal duplication of operations andthat participate in product lines the firm is not in. “We look atthem as mergers and not acquisitions,” Mr. Cavaness said.

Preston Gough is president of the managing general agencydivision of CRC Insurance Services in Jackson, Miss., doingbusiness under the name Southern Cross Underwriters, the MGA hestarted years before it was acquired by BB&T Insurance Servicesback in 2003. BB&T Insurance is the insurance brokerage arm ofBB&T Financial Services of Winston-Salem, N.C.

At the time of the acquisition, Mr. Gough said Southern Crosswas not for sale. BB&T executives approach his firm becausethey saw a need to fill out their CRC wholesale brokerageoperations with an MGA and were looking for a successfulpartner.

At the time there was another suitor that Southern Cross couldhave gone with and made a bit more money, but Mr. Gough explainedwhat he found was the cultural fit BB&T offered that the otherslacked.

“The personalities fit, but more than that, they understand thedistribution system,” said Mr. Gough, adding he has no regrets andis extending his five-year contract with the firm for another fiveyears.

In his current role, Mr. Gough said his main interest is seekingout other acquisition partners in the MGA world, noting BB&Tseeks “the best of the best.”

At Dallas-based U.S. Risk Insurance, Art Seifert, president andCEO of Lighthouse Underwriters, a program underwriter andsubsidiary of U.S. Risk, said acquisition strategies are now morefocused on smaller operations that will be profitable almostimmediately. There will be less of the large-scale type ofacquisitions, he said, because they involve a longer-terminvestment and difficulty in assimilating the business into theexisting structure.

“The ability to absorb a big acquisition, no matter who it is,hurts the bottom line,” Mr. Seifert said. “Anyone who says that asignificant merger or acquisition doesn't hurt the bottom lineinitially is either crazy, lying or in denial.”

“It costs money to merge or acquire somebody, and when themarket is down like it is now, that is not necessarily a time whenyou want that additional cost that you have to absorb,” he added.“You need to do smaller deals that are more easily assimilated andaccretive to the bottom line as quickly as possible.”

Instead of taking the acquisition route, Mr. Seifert saidinsurers are buying up niche programs and putting them on their ownpaper. They purchase programs from a program manager in a placethey want to grow without incurring the acquisition costs of thefirm. The program manager continues to write the business as theyhad before.

“It's a fairly easy way for a carrier to pick up a chunk ofpremium all in one pop,” Mr. Seifert said, noting that his own firmis looking to acquire books of business instead of a wholesaler oragency. “It is expansion that is new [for wholesale producers], butit's not a new strategy.”

When a deal fails, there are several reasons, but they primarilyfall into two categories, these dealmakers say–the failure tocommunicate properly and the failure to perform proper duediligence.

Mr. Treanor said that a major problem with Marsh's acquisitionof Johnson & Higgins back in 1997 was the failure on the partof Marsh to properly portray the deal to J&H executives. Theresult was an exodus of J&H senior management.

Mr. Treanor, who worked at J&H when it was acquired, saidone major lesson he learned from that experience was that “you justhave to be honest with your partners about the nature of the dealand how it will be laid out. Communication is critical.”

Hiring a professional consultant is another critical aspect ofmaking sure a deal is successful, Mr. Gough noted. Deals havebecome so complex that having someone who is expert in the processhas become indispensable. “You need a qualified consultant in yourcorner,” he said. “There is a lot of time involved–and the fee isrecoverable in a deal.”

BB&T presents a potential partner with a 15-page documentasking for detailed information about the firm before discussionsbegin, he said. BB&T is not looking for Mom-and-Pop operations,he noted, adding that the detailed questionnaire can tell BB&Thow serious the firm is about making a deal.

“We go the nth degree to make sure it is a proper match,” hesaid. “If it is not a wonderful fit on both sides, we do not getinvolved. There is not a quota goal to acquire. We just want to getthe best ones out there.”

“Why do deals fail?” Mr. Cavaness asked. “Usually someone talksthemselves into it and [he or she] has not done true soulsearching.”

“We are very careful about doing the right deal for the rightreason. We don't want people who are looking to cash out. We wantpeople to stay a while with us,” Mr. Cavaness said.

See related articles:

o More Broker Views: Advances Continue

o E&S Insurer M&A Deals More Than Just The Numbers