During the agency-acquisition frenzy of 2007-2008, privately held brokers were often left out in the cold. They wanted to get in on the buying action but in many cases were unable to compete for deals.
They were frequently outbid and outhustled by banks and public brokers that had deeper pockets, stronger valuations and a better story to tell potential sellers.
My how things have changed!
Following the economic meltdown in late 2008, deal activity slowed to the lowest level in a decade. Banks, stymied by liquidity concerns, nearly stopped acquiring altogether. Public brokers also slowed their dealmaking as access to capital tightened.
Enter the privately held acquirer. After years of coming in a distant third to banks and public brokers, privately held brokers have done more acquisitions than any other buying group during the last two years.
But will this trend carry on in 2011, a year in which deal activity is expected to continue to accelerate?
Private buyers definitely will see tougher competition, but they will still be able to find M&A success if they can put together an offer that performs well in the four key areas that drive a seller's decision.
1) Price. Of course, price (or valuation) is the main factor. There is no quicker way to lose than to be non-competitive when pricing a deal.
Today, with bank stock prices recovering and with public broker market capitalizations hitting their highest EBITDA multiples since 2006, acquisition valuations are on the rise.
For privately held brokers to compete, they need to continue to focus on local fold-in opportunities where they can match (or even exceed) the valuations of others by consolidating a local peer into their office. Blindly hoping to find sellers willing to take a significant "home-town discount" will prove as unsuccessful as it does with free-agent sports figures.
An alternative for privately held brokers is to find an agency whose principals have a strong desire to remain independent but want to take some, but not all, of their chips off the table. In these situations a friendly merger can work, with the sellers retaining shares in the privately held partner they've selected.
2) Resources. A key reason agencies sell is to gain access to resources they need to stay competitive. For smaller agencies, these resources tend to be pretty simple: more insurance carriers, better automation, more sophisticated client support, dedicated agency management.
For midsize and large agencies, client-facing specialty resources are becoming increasingly important and costly, as clients demand service customized to their industry.
Public brokers frequently have a powerful advantage here but sometimes struggle to make their best resources available locally—giving private brokers an opening.
3) Greenfield Opportunity. This is a situation where a seller is provided a chance to exploit a new, untapped opportunity existing within the buyer's firm. It could be a personal opportunity, such as a chance for leadership in a larger organization, or it could be a collective opportunity, such as the chance to cross-sell insurance to a bank's customers, that can lead to greater enthusiasm among employees as they evaluate what life after the deal will be like.
In addition, if there is an earn-out, the ability to capitalize on the greenfield opportunity can ultimately result in a material enhancement to the deal pricing.
4) Culture. Most agency owners are proud of the culture they've built and want to take steps to preserve it going forward. During the peak of their acquisition activity, many banks were able to use this issue, perhaps counter-intuitively, to their advantage by offering a "hands-off" philosophy of agency autonomy.
Still, the culture question is the one that provides privately held acquirers the strongest natural advantage. Many agencies that sell to, or merge with, a privately held peer say that preserving the benefits of a privately held culture was a major driver of their partner-selection process.
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