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

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

One wholesaler making its first acquisition this year was Mercator Risk Services in New York. Formed in 2006, Mercator shied away from the idea of growing through acquisition because it is so difficult to find the right partner to grow the business, said Chris Treanor, president and chief executive officer.

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

He said he feared an acquisition could have the opposite effect of growth, instead diminishing the organization he and his colleagues were trying to build.

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

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

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

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

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

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

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

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

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

More important, he said, is getting to know the people, and understanding if their views of the wholesale business are the same as those of RPS. “You have to get to know the people because it is all about the people,” he said. “We do a heavy amount of due diligence and urge them to do the same. There are extensive integration discussions. [Both parties] do not like surprises.

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

Preston Gough is president of the managing general agency division of CRC Insurance Services in Jackson, Miss., doing business under the name Southern Cross Underwriters, the MGA he started years before it was acquired by BB&T Insurance Services back in 2003. BB&T Insurance is the insurance brokerage arm of BB&T Financial Services of Winston-Salem, N.C.

At the time of the acquisition, Mr. Gough said Southern Cross was not for sale. BB&T executives approach his firm because they saw a need to fill out their CRC wholesale brokerage operations with an MGA and were looking for a successful partner.

At the time there was another suitor that Southern Cross could have gone with and made a bit more money, but Mr. Gough explained what he found was the cultural fit BB&T offered that the others lacked.

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

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

At Dallas-based U.S. Risk Insurance, Art Seifert, president and CEO of Lighthouse Underwriters, a program underwriter and subsidiary of U.S. Risk, said acquisition strategies are now more focused on smaller operations that will be profitable almost immediately. There will be less of the large-scale type of acquisitions, he said, because they involve a longer-term investment and difficulty in assimilating the business into the existing structure.

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

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

Instead of taking the acquisition route, Mr. Seifert said insurers are buying up niche programs and putting them on their own paper. They purchase programs from a program manager in a place they want to grow without incurring the acquisition costs of the firm. The program manager continues to write the business as they had before.

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

When a deal fails, there are several reasons, but they primarily fall into two categories, these dealmakers say–the failure to communicate properly and the failure to perform proper due diligence.

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

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

Hiring a professional consultant is another critical aspect of making sure a deal is successful, Mr. Gough noted. Deals have become so complex that having someone who is expert in the process has become indispensable. “You need a qualified consultant in your corner,” he said. “There is a lot of time involved–and the fee is recoverable in a deal.”

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

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

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

“We are very careful about doing the right deal for the right reason. We don't want people who are looking to cash out. We want people 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

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Cultural Fit Helps Drive E&S Broker Merger Success

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