NEW YORK–Conditions are right for an increase in merger and acquisition activity, but the state-based system of regulation is helping to impede the number of deals taking place, according to an expert.
The observations came during Standard & Poor's "Insurance 2008 Conference: Operating Within a Global Economy," held here today.
Speaking as part of a broader panel, V.J. Dowling, managing partner, Dowling & Partners Securities LLC, noted that M&A activity has been slow, and he added that last year, even the $250 million-plus deals that did occur were not what he called "traditional deals" involving public companies. Instead, they involved mutual companies, foreign companies, and in one case, a hedge fund, he said.
One reason for the slower activity, Mr. Dowling pointed out, is the state-based regulation of insurance. He cited one example in the past where Alleghany Corporation attempted to buy the St. Paul Companies. The deal received much of the necessary approvals, he said, except for a few states, and that killed the transaction.
State regulators sometimes view their roles as job protectors for their particular states, Mr. Dowling said, and he reasoned that some deals cannot occur unless the companies being bought "raise their hands" to be purchased.
He noted that in the current soft insurance market some companies may begin to raise their hands. Mr. Dowling said that it makes sense for two overcapitalized companies to merge together, especially if the deal increases diversification. He also said that valuations are lower now than they were a year ago, so deals may look better.
Mr. Dowling added that U.S. companies need to be mindful of their small size relative to foreign companies. U.S. companies, he said, are "pup-sized" compared to larger companies in London, for example, and this may help spur some M&A activity.
Regarding the market conditions as a whole, Robert E. Glanville, managing director, Pine Brook Road Partners, LLC, said that companies are not as reckless in this soft market period as they have been in previous cycles. He said he has yet to meet a company in this cycle that has named growth as the primary objective. Property-casualty companies, he said, are instead looking for effective return on their capital.
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