The hard work begins post handshake
What is currently affecting M&A activity in the Bermuda market?
The mergers and acquisitions (M&A) market has certainly been active in Bermuda over the past couple of years. Among the most notable deals are Exor’s acquisition of PartnerRe, the XL-Catlin transaction, Sompo’s acquisition of Endurance and Liberty Mutual’s acquisition of Ironshore.
Just when you thought it was safe to go in—or perhaps out of—the water, AIG announced its acquisition of Validus, a company that many in the industry thought of as an acquirer rather than a target. The AIG acquisition of Validus seems to have been well-received by the market, providing AIG with access to new markets and lines of business and a strong team to drive future growth. Also, recently, AXA announced its acquisition of XL.
The real question is, will this be the start of another upsurge of M&A activity? Several attractive targets are rumored to be part of the next wave, along with some companies that may have experienced a misstep and would be ripe for the picking.
Is there appetite for M&A at the moment, and will that change?
The current rate environment on the investment and the premium side has driven the consolidation trend over the past few years. With the Q3 hurricanes of Harvey, Irma and Maria, combined with other catastrophes, including the California wildfires, the thinking was that the premium rate environment would be changed significantly and that would slow the M&A trend.
However, as the negotiations played out, the premium environment, considering new capital coming in to the market, was not as hard as we thought and that may allow the M&A train to keep moving down the track.
It is still too early to fully understand the impact that January’s US tax reforms will have on the structure of companies and whether this will drive further acquisition activity by US companies. For companies looking to acquire a Bermuda operation, the Validus transaction means one of the most attractive companies is now off the table, and it will be interesting to see whether the limited remaining options put pressure on those looking to acquire to make a deal, or whether this recent transaction puts pressure on the remaining targets.
Although we are still seeing new startups in Bermuda, the result of the numerous acquisitions over the past few years is shown in the size of the players, with some old, big dogs now looking like little pups and finding it increasingly difficult to compete with scale.
What could the M&A deal flow be like in 2018?
As for the future, a crystal ball would be handy. With 2018 off to a roaring start with the AIG–Validus and AXA–XL transactions, the effects of the current interest rate environment, the fairly soft market continuing and the uncertainty of the impact of US tax reform, we are likely to see at least one additional significant acquisition in 2018.
What tips can you give to enable M&A deals to be completed smoothly?
It is rare for a major transaction to occur serendipitously. The majority happen as a result of a vision and strategy by company leadership, which is focused on creating value for its stakeholders. Using acquisitions, or inorganic growth, is one means to that end. From our experience, a strong corporate planning and development department can help in that regard.
Once a target has been identified, price is, of course, a major issue. What does the buyer gain by acquiring control of the target? How much is the buyer willing to pay for those benefits? Will the buyer enjoy benefits over and above those seemingly available to a typical market participant? If so, how does the buyer avoid paying for all of them upfront? Moreover, what happens to the buyer’s cost of capital going forward?
Answers to these questions are not readily available. They require thoughtful consideration combined with complicated financial modelling of various potential outcomes.
Organisational structure could change and, quite possibly, in a very substantial manner. Along with this comes a plethora of issues around tax efficiency, technology and internal reporting.
Let’s not forget that beyond the numbers there are people. Redundancies are not uncommon and need to be carefully managed through the integration process. The last thing you’d want to happen is for the culture to collapse because of a hasty integration.
These issues and many others must be carefully considered and managed. In other words, the hard work begins once the CEOs shake hands.
David Brown is the senior partner of EY Bermuda and the regional insurance leader for Bahamas, Bermuda, British Virgin Islands and Cayman Islands. He has more than 28 years of experience serving SEC registrant insurance and reinsurance companies.
Steven Napier is an executive director and regional leader of the Valuation & Business Modeling practice, and is based in Bermuda. He focuses on the valuation of businesses and securities as well as intellectual property and intangible assets.
