Study: Brokers Acquiring At Record Pace
NU Online News Service Oct. 26, 4:14 p.m. EDT?The middle-market brokers, who have pursued aggressive acquisition campaigns to achieve revenue and profit goals, have been gobbling smaller firms at an even faster pace this year, according to an investment bank firm.[@@]
WFG Capital Advisors in Harrisburg, Pa., also said that actions by New York Attorney General Eliot Spitzer that are halting controversial broker fee arrangements will not stop the buying trend, and may accelerate it.
The large middle-market brokers have become more dependent on growth through acquisition, according to WFG, which found among brokers it reviewed, 15 percent spent more on acquisitions during the first six months of this year than during all of 2003.
WFG said it analyzed acquisition activities of five of the leading middle-market firms?which included Arthur Gallagher, Brown & Brown, Hilb, Rogal and Hobbs, Hub International, and U.S.I. Holdings?for the year 2003 and first six months of 2004.
According to Steven Wevodau, managing principal of WFG, agency purchases are accelerating on several fronts.
First, he said, the target segment of brokers studied has spent 15 percent more in acquisitions during the first six months of 2004 than they did for the entire year of 2003.
Mr. Wevodau said secondly that acquired revenues for the same periods indicate that during the first half of 2004, these brokers acquired a total of $186.9 million in revenues, which represents a 15 percent increase compared with all of 2003 when the figure was $163.7 million.
These findings, he said, "solidify our position that the softening product market is forcing leading firms to accelerate their acquisition strategies to cover ?gaps' from declining organic revenue growth."
Robert Lieblein, another managing principal at WFG, commented, "Another notable conclusion is that there is actually no shift in purchase prices paid when contrasting the analysis periods."
"Contrary to some speculation, prices have remained constant among the brokerage segment." Mr. Lieblein added.
"The Eliot Spitzer cases," he said, "may temporarily slow industry consolidation, but our firm belief is that when there is so much scrutiny placed on contingent, wholesale and reinsurance commissions being funneled back to the retail segment, when the dust settles, acquisitions will actually have to play a larger role in many firm's growth.
"We believe that the prospective rate of consolidation will be even greater than before, especially in light of little or no change in product pricing. These firms somehow need to aggressively fill gaps and deployment of capital in the quickest way to contend with the street's expectations."
Benfield figures show that the leader in purchases, Brown & Brown, spent $145 million on 21 acquisitions in the first half compared with $86.2 million on 23 acquisitions last year.
Total spending on purchases for the five brokerages mentioned was $322.8 million in the first half for 41 acquisitions compared with $282.8 million on 58 acquisitions last year.
WFG said its Web site, www.wfgca.com, offers more acquisition information by clicking on the Broker Insights icon.
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