Merger and acquisition activity among insurance brokerages in 2009 dropped 40 percent over the previous year due to a generally tough economic environment and other factors, an investment banker reported.
Hales & Company said the overall number of announced transactions fell to 185 in 2009 compared to last year's record 307 transactions.
It was the first year that the number of merger and acquisition transactions fell below 200 since 2003, the firm said, adding that it was one of the least active of the decade.
There were five reasons for the activity fall-off, according to Hales:
o Uncertainty about the economy.
o The threat of a public option in national health care reform.
o Instability in the credit markets.
o Banks focused on strengthening balance sheets and increasing stock prices.
o Lack of capital and increased cost of debt, which reduced private equity group activity.
The valuation of transactions, based on EBITDA (earnings before interest, taxes, depreciation and amortization), fell between 10 percent and 20 percent from 2008 levels.
"This decrease in valuation multiples resulted in a significant valuation gap between buyers and sellers and caused many sellers to take a wait-and-see approach to selling their agency," Hales said.
Purchase prices fell from 5.75-to-6.50 times EBITDA, to 4.75-to-5.75 times EBITDA last year, the firm added.
The deal volume in 2009, Hales noted, is comparable to the average of transactions done from 2000 to 2003. Most of the deals were for property and casualty agencies, Hales noted. Indeed, during 2009, 140 (or 76 percent) of all announced transactions were for p&c agencies, compared to 201 or (66 percent) during 2008.
In a reversal, the number (43 versus 99) and percentage (23 versus 32 percent) of employee benefit transactions decreased significantly from 2008. The main reason for the decrease was due to the uncertainty related to health care reform, according to Hales, which said that "the unknown caused many buyers to slow down or delay employee benefit firm acquisitions."
In a statement, Rob Lieblein, managing partner of Hales, said as the markets and economy improve there should be an improvement in M&A activity in 2010.
"We expect that various economic, market and political dynamics will begin to improve and both buyers and sellers will be more committed to actively engaging in merger and acquisition activity," he said.
"Overall, we are taking the 'glass is half full' approach to the M&A market for 2010," noted Mr. Lieblein. "All the fundamentals are aligned properly to jump-start merger and acquisition activity."
He predicted that "demand and supply should both increase as clarity develops around the economy, market and health care reform during 2010."
He added that "the pricing gap should continue to close between buyers and sellers, as we believe valuations will increase slightly and sellers will be more realistic in their valuation expectations."
Overall, he said, "we do believe that 2010 will be remembered as 'The Year of Clarity' as buyers and sellers come to the realization that long-term growth to increase revenue and profitability and maximize shareholder value needs to be fueled by a robust M&A market in which buyers and sellers can adequately address their growth and perpetuation plans."
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