By Tim Cunningham and Dan Menzer

2007 and 2008 were banner years inthe agency-brokerage merger and acquisition market, with more deals at thelargest aggregate value than at any time in history. But everythingbegan to change at the end of 2008: the economy entered the mostsevere recession since the Great Depression; the stock market hadcrashed and the global economy was in shambles. To add to the pain,the insurance market remained soft, with the possibility theeconomic turmoil would exacerbate or prolong the soft market in a"perfect storm" scenario.

In spite of this, however, the agency-brokerage business hasbeen, is and will remain attractive to buyers, as its cash flow isreasonably predictable and it is not overly capital intensive.However, along with the perfect storm events, the need to preservecapital or the inability to raise capital has created the current"dead calm" environment. Many of the active players on the M&Ascene have grown cautious and conservative due to the inability topredict when any semblance of economic recovery and market firmingwill occur. A no call may be the best call.

This cautious approach is a far cry from 2007 and 2008, whichclearly represented a "seller's market" era for insurance agencytransactions. There were 237 publicly announced transactions in2007, followed by a whopping 264 transaction in 2008, the largestnumber in the past 10 years--and keep in mind that publiclyannounced transactions represent only 15 to 25 percent of alldeals.

The group of buyers was diverse: from public brokers to regionaland local brokers to new and existing bank acquirers to the newlyemerging private equity acquirers. These buyers were anxious toimprove top and bottom lines, acquire niches or specialties, expandgeographically or simply enter the business. Pricing wasaggressive, at record-breaking multiples.

But although there were still some big deals on the horizon, theM&A market started to slow in mid-2008 and seemed to come to acrashing halt as we finished 2008 and turned the calendar to2009.

In October 2008, Willis Group closed the acquisition ofHRH, and it appears both of those firms are actively engaged in theintegration of the two operations. In early 2009, Arthur J. Gallagher, HUB International andUSI Holdings agreed topurchase the policy renewal rights of all of Liberty Mutual/Wausau InsuranceCo. middle-market business. While not as significant as theWillis-HRH transaction, these three brokers, each of whom have beenvery active on the buy-side, will be engaged in integrating theirrespective components of this transaction. At the same time, CEOsof several companies have stated publicly they do not expect 2009to have the volume or flow of M&A deals, and their willingnessto be as aggressive on pricing will be substantially less until theeconomy settles down and returns to some degree of normalcy.

Consequently, several of the large brokers that made manyacquisitions will likely have a more cautious attitude toward dealsin 2009. Deal volume in the first quarter of 2009 is downsubstantially from the same period in 2008. The hard reality is thelarge active buyers are the trend setters, both in creating acertain deal fever and setting the pricing standards with many ofthe remainder of potential buyers following suit.

For potential sellers, the question is how long to sit on thesidelines and wait, and what can be done in the interim.Unfortunately, the crystal ball we normally use in these situationsis a bit cloudy, so we have to rely on more traditional financialanalysis. Although unemployment continues to climb, the economyremains rocky and insurance pricing is still falling, most punditssay there are glimmers of hope, and recovery is likely to begin bythe end of 2009.The Dow Jones has climbed more than 25 percentsince its most recent bottom, reinsurance pricing is on the riseand there appears to be a little more optimism in the press and inthe minds of many Americans.

Given prior cycles, the traditionally active buyers will likelyreturn coincident with the economic recovery, and there could be anuptick in M&A activity in 2010. In addition, as before, theremay be new entrants--perhaps a new wave of private equity orfinancial institution-type buyers. As the larger firms willstruggle to grow organically or achieve adequate scale in the nextcycle, acquisitions to supplement the top line will be back invogue. Further, the desire to expand geographically or to enter orenhance niches will be seriously influenced by a "buy" versus"build" model.

Things may already be turning around. In a recent nationalsurvey of middle-market merger professionals conducted by theAssn. for Corporate Growth and Thomson Reuters,88 percent of respondents said the current M&A market is fairor poor, but 56 percent said they expected the number oftransactions to increase in the next six months.

Assuming that an active buy-side market will return, prudentprospective sellers should use this interim period to positiontheir firms to capitalize on the market turn. Run the firm like abusiness--focusing on organic growth and profitability. Directattention on efficiency, process and incremental improvement as youtrim the fat and streamline operations. In short, transition thefirm into the well-run business you would want to acquire.

Tim Cunningham and Dan Menzer are principals with OPTISPartners, LLC, a Chicago based investment banking and consultingfirm providing M&A, valuation and strategic consulting servicesto firms in the insurance distribution sector. Tim is a member ofthe AA&B editorial advisory board. The authors can be reachedat 312 235-0081, [email protected],or [email protected].