Questions asked over consolidator model

Models of people representing mergers and acquisitions

Recent acquisitions and shareholder tension at consolidators puts model under the spotlight

The merits of the consolidator model came under scrutiny again last month as mainstays Giles and Towergate returned to occupy column inches.

Fresh after its high-profile acquisition by Arthur J Gallagher, Giles stirred controversy when it confirmed to its class A and B shareholders in Expectrum that “there are no proceeds available for any payment”.

The ramifications of the Insurance Age exclusive divided the marketplace with some expressing outrage at the news and others insisting that due to the nature of the broker’s debt, its shareholders should never have banked on any payout.

This was followed by Towergate announcing that it would split its retail division into two units –Towergate Insurance Brokers and Towergate Direct.

Towergate Insurance Brokers will boast the company’s face-to-face broking businesses while a new operation, Towergate Direct, will focus on the company’s direct-to-consumer SME and specialist personal lines business.

Group CEO Mark Hodges maintained that he was “confident” that the reshape would help achieve “top-line growth and support the delivery of our strategy”.

Yet, despite the upbeat pronouncement, the old saying ‘if it ain’t broke, don’t fix it’ remains valid as unanswered questions linger. So has large-scale market consolidation of the ‘noughties’ not borne the fruit it originally intended?

p6-quote-1-1113Stuart Reid, executive chairman of Bluefin, insisted that the consolidator market “still absolutely works” despite all the pronouncements of industry naysayers.

“Some [consolidators] have integration indigestion, but it took Bluefin a good five years to fully integrate – a consolidator buying large and integrating is a really powerful thing to do,” he argued.

Integration challenge

Indeed, Gallagher’s recent activity has led to natural comparisons in that, as it piles on the acquisitions, it will soon face the same integration, cost-saving and debt challenges that have characterised the efforts of its counterparts. Taking Giles on its own, a group which employs over 1,250 people and operates from 43 offices, the task of combining the two brokers will surely be a logistical and time-consuming challenge of the highest order.

Assessing the job at hand, John Needham, insurance partner at accountant PKF Littlejohn, stated that Gallagher’s team could well have the ability to overcome the well-documented pitfalls.

p6-quote-2-1113“Gallagher has a very strong back office and compliance team with a huge amount of experience,” he analysed. “Gallagher has invested a lot in its back office operation and is trying to do it right in terms of buying firms and bedding them in correctly.” 

At the same time, however, Needham explained that the importance of acquisitions and consolidation can often be overstated.

He cited that a well-run broker securing 5-10% organic growth on an annual basis is an impressive achievement in the current environment.

“You have to be realistic about what your business plan is and what you are trying to achieve out of acquisitions,” he explained. “I get more nervous the more leveraged brokers are, it gets increasingly risky.”

Certainly, the potential danger of over-leveraging and being saddled by an ever-growing pile of debt that requires annual servicing is anathema to many independent brokers.

Debt-free

Simon Taylor, managing director at Reich Insurance, described his company as “fiercely independent” and explained that he has consistently rebuked any approaches from acquisition-hungry brokers and networks.

p6-quote-3-1113“We are almost debt-free, even when we do buy we only buy on the basis we can pay it back relatively quickly,” he said.

And he insisted that one of the first aspects he flags up when speaking to potential clients is that the broker is independent. “This provides better opportunities for the clients without any tied loyalties,” he said.

Assessing the value of acquisitions, Taylor warned that despite the scale they bring, they can also lead to brokers taking their eye off the ball in terms of client service as they instead focus on integrating divisions and staff.

“Working with networks and consolidators would limit the ability to do what we want,” he added. “I value the opportunity to paddle my own canoe.”

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