Re/insurers pursuing M&A need to pay close attention to the presentation and thinking behind strategic acquisitions, while looking to retain talent and reassure key stakeholders.
That is the word from John Andre, group vice president and Steve Chirico, assistant vice president at AM Best, who tell Bermuda:Re that both acquirer and acquired can expect to face what is often a lengthy “dance”, and one not without risk.
Chirico says that few companies “will offer a price and shake hands”, describing much of the initial acrimony in the M&A space as “adversarial posturing on the potential acquired’s side. If the company feels it can get a few more bucks on the share price, then a little dance will occur”.
He cautions however that the companies behind the most successful mergers have “got their PR right”. The wrong tone or approach can create problems when it comes to securing talent and reassuring brokers and cedants of the value proposition of any future entity.
“How you broadcast the deal affects how it is perceived by the market and may well affect the next renewal,” says Chirico. As Andre explains, the uncertainty around any M&A deal is unwelcome among clients looking for transactional certainty.
The same is true of the human capital affected by any M&A deal. “This is a talent sensitive business”, says Andre and securing the support of line managers for the deal is particularly important.
“Having key managers onboard is always vital when we see a transaction. You are not only acquiring the book, you are also acquiring the talent and hopefully locking them up,” explains Andre.
This is particularly important in the face of the uncertainty that comes with M&A. Further suitors may throw their hat into the ring and both entities need to continue writing business as—and if—any deal unfolds.
As Chirico explains, “acquirers face both execution and integration risk”, with implications for their share price, at least in the short-term.
“Insurance is a capital business, so assuming you are issuing stock or using cash to buy another company, from a financial shape perspective the acquirer is in worse shape during any transaction than they were before any deal.”
For the potential acquired, their share price is likely to benefit from a bump thanks to the premium being paid on most acquisitions, but will face other challenges, particularly if any deal or negotiation is protracted.
“M&A can prompt a loss of talent or books of business,” says Andre, an issue that is likely to be more acute at a potential acquired, or on lines that might be duplicated or peripheral in a new combined entity.
Either way, negotiations will generate uncertainty and may well undermine the business prospects of both entities in the short-term.
Then there is the potential that the deal will fall through, with all the financial and PR costs this will mean for the two entities, says Chirico. The entry of further suitors will likely further muddy the waters.
Acquirers therefore need to make a compelling case to the acquired’s management, shareholders and the market. If they fail to do so, they may not even overcome the hurdle of execution risk.
AM Best, M&A, acquisitions, insurance