Culture Matters In Making Mergers Work

Culture Matters In Making M&As Work

Two top acquiring brokerages want partnerships, not buyouts, to assure success

In looking for a reason to explain the failure of agencies to successfully merge with bigger firms, one reason often cited is the inability of their respective cultures to mesh.

The key to successfully executing such deals, according to two national brokerages that are active in agency acquisitions, is to acquire solid professionals, not just books of business, and to keep key players in place after a merger.

When discussing the concept of culture as it relates to growing their business through mergers and acquisitions, there is much commonality in approach and philosophy between Daytona Beach, Fla.-based Brown & Brown Inc. and Arthur J. Gallagher, headquartered in Itasca, Ill.

Indeed, neither is known for announcing the mega-deal. Instead, they have sought to build their operations through the acquisition of smaller firms–not to assimilate them to mirror their own massive organization, but to create a substantive partnership aimed at benefiting both entities in the long term.

However, this partnership is still governed by an overriding corporate culture emphasizing independence and uniqueness at the acquired firms.

“Culture is hard to define,” observed Warren Van der Voort, corporate vice president and director of mergers and acquisitions for Arthur J. Gallagher. “You feel it and sense it. What that means at Gallagher is the inner fabric that sustains us in difficult times. It's a warm, fuzzy thing–a real spirit of collegiality that benefits our company and our partners.”

“We are different from other mid-market brokers, and other publicly held ones, in that we are highly decentralized,” explained Cory Walker, chief financial officer for Brown & Brown. “In our environment, the number-one criterion we ask of any acquisition partner is: do you have a leader? We do not have people in Daytona sitting on the bench ready to parachute into an agency to run it.”

Mr. Walker said that an individual interested in merging with Brown & Brown already has an understanding of the type of organization they are going to be joining.

“We are focused and disciplined, and those who like focus and discipline are attracted to us,” he said. “But anyone who is looking to put money in the bank and coast off into the sunset, they are not attracted to our environment.”

“There is a misperception that because we are efficient, that we go in and change the operation,” he continued. “[The principal] has got to run their own operation. The last thing we want to do is go in and tell them how to run the operation, and we do not want to tell them what to do.”

At Gallagher, executives share a common approach to management and relationship with their business, according to Mr. Van der Voort.

“We created the environment we have today when we were small, and have built on it when we grew bigger,” he said. “What we look for is compatibility and purpose of people with an agreed direction. We look to build with the best professionals in the business and make them investment partners. We do not look to cut and carve up but to bring them together for a bigger, better purpose and benefit from our coming together.”

Both say they do not look to disrupt the organizations they acquire. In fact, they want them to remain intact and thrive with their new corporate parent. And both look for “good people” who want to work hard and succeed.

“The company that has the most good people ultimately wins, and that is what we want,” said Mr. Walker.

“The traits we look for relate to its corporate culture,” noted Mr. Van der Voort. “Is it a competitive team? Is it innovative? We evaluate merger partners on their personnel. It may have good administrators, but it is people we acquire, and that is what we most focus on because they are who bring a company together to do bigger and better things.”

He said the kind of agency partner Gallagher looks for involves a firm where the atmosphere feels “upbeat and turned on,” and where its management is “open and discusses issues with employees.”

“We want a 'We' not just a 'Me' atmosphere,” he added. “We look for people who take pride in their job and want to be part of the success.”

“Size is not an issue,” he continued. “We seek partners–we just don't look at revenues and earnings alone. Within the organization, there needs to be a good entrepreneurial spirit and good representative in their business and community, and they must be profitable.”

Both, however, note that they have had their failures.

Mr. Walker credits the regional vice presidents who set up the deals with having a good nose for good partnerships. However, he recalled, in one case a partner turned around shortly after the deal and said he no longer wanted to run the operation.

“We swallowed hard and took one of our managers out of another office and put him in there,” said Mr. Walker. “That person is a strong leader and the agency did not miss a beat. It was a $3-to-$4 million operation, and today it is over $17 million.”

He noted, however, there is a need to develop people. “It takes a leader to develop another successful leader, so we can have more leaders to move up and run high-quality operations,” said Mr. Walker. “We buy leaders and people, not assets.”

“First and foremost, if it doesn't feel right, and the deal does not have the ability to come together in a natural fit, than we need to take a second look at it,” said Mr. Van der Voort. “We have no interest in just doing deals to do numbers. When you force it, it may look good on paper, and it may look good for a year or two, but ultimately you will stumble and not get the growth to achieve. Ultimately, that is something you are forced to face.”

“Those who run the numbers pay the price if it is not a good, solid, strong deal with partners that will work together and it becomes a struggle for growth,” he observed.

“Just merging for numbers does catch up with you,” he added. “Those that got lost in the numbers, in the past, did a lot of deals where they were just looking at the number of deals. But the internal growth stopped and they lost the company in the process. In the end, someone else acquired them.”

Caption for parachute shot:

When Brown & Brown takes over a smaller agency, they want its leaders to stay on rather than parachute in an executive to run it.

“We look to build with the best professionals in the business and make them investment partners. We do not look to cut and carve up, but to bring them together for a bigger, better purpose and benefit from our coming together.”

Warren Van der Voort, Director, M&As

Arthur J. Gallagher: