“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. Overall, we are taking the “glass is half full”
The overall number of announced transactions in 2009 was 185, down 40 percent from the record year of 307 transactions in 2008. The year 2009 was one of the least active of the decade and the first year to see the number of deals dip below 200 since 2003. Buyer demand dropped significantly during 2009 due to the following key factors: (1) uncertainty about the economy; (2) threat of national health care; (3) instability in the credit markets; (4) banks focused on strengthening balance sheets and increasing stock prices; and (5) lack of capital and increased cost of debt which reduced private equity group activity.
Transaction valuation multiples also had an impact mergers and acquisitions activity. Multiples fell about 10 and 20 percent from 2008 levels. While the decrease impacted almost all transactions, it was particularly noticeable in the guaranteed purchase price for revenue or fold-in acquisitions where the average was approximately 4.75 times to 5.75 times EBITDA (earnings before interest taxes depreciation and amortization) during 2009 compared to 5.75 times to 6.50 times in 2008. 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.
Not surprisingly, due to economic and market challenges, all key acquirer groups had a decrease in activity compared to 2008. Insurance brokers, public and privately held, led the consolidation efforts with a total of 131 transactions during 2009, a decrease of 37 of percent compared to the 208 transactions in 2008. Insurance brokers represented 71 percent of all deals. Following insurance brokers in the distance were insurance and other acquirers with 33 (18 percent), and banks with 21 (11 percent).
Total deal volume in 2009 is comparable to the average of 184 transactions from 2000 to 2003. This average is significantly below 284 transactions averaged during the “bull market” years of 2006 through 2008.
The profile of acquired agencies remains heavily weighted toward property and casualty firms. 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. The unknown caused many buyers to slow down or delay employee benefit firm acquisitions.
What does recent M&A history portend for 2010 and beyond? According to Rob Lieblein, Managing Partner of Hales, “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. Overall, we are taking the “glass is half full” approach to the M&A market for 2010. All the fundamentals are aligned properly to jump start merger and acquisition activity.
Demand and supply should both increase as clarity develops around the economy, market and health care reform during 2010. 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. 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.”
About Hales & Company:
Hales & Company, with offices in New York City, Harrisburg, Chicago, Seattle, San Francisco, Southern California, Hartford and Washington, D.C., is the preeminent financial advisor in the insurance industry. In the past five years, Hales has completed more than 120 transactions with deal value totaling $2.4 billion. For more information, please visit our website www.halesgroup.com.