Our survey of independent brokers on mergers and acquisitions reveals some unpalatable home truths for consolidators, but there is general agreement that consolidation should happen. Sandy Maxwell reports.
It seems that every week we're hearing about consolidators and aggregators picking off independent regional brokers.
But the views of independent brokers about mergers and acquisitions are rarely aired. So, we've surveyed the market - and not just the big players. More than half our respondents had a GWP of less than £10m.
Our survey uncovered serious concerns about margins. Almost three out of four respondents cited declining margins as likely to influence any decision they would make to sell out over the next two or three years.
Brokers were divided on the issue of whether independent broking is in long-term decline. While 49% of respondents didn't think this was likely to influence them, almost the same percentage thought it might be a factor.
And regulation is still a source of frustration. Seventy per cent of brokers indicated that frustration with red tape could influence them to sell their businesses.
Asked what sort of perceptions they had of potential suitors, many respondents were turned off by the style of acquirers - "aggressive", "bulldozers" and "crude" were all mentioned.
Concerns were also raised about customer service and client retention issues. One broker said: "Experience shows service deteriorates and retention suffers."
Swinton head of acquisitions Hazel Walker agrees that customer service is a concern. But she emphasises that, at Swinton at least, customers are cared for: "Without a strong customer proposition and quality customer service to underpin any acquisition the benefits from M&As will not be realised.
"Entrusted in the right hands, customers will continue to receive a first rate service and, indeed, with Swinton's considerable high street presence they can receive the service face to face."
Other brokers were equally worried about the challenges of combining two corporate cultures, while compliance was also cited as a potential problem.
One respondent clearly articulated the challenges for aggregators: "A company which has worked hard to create a culture will struggle to retain it. A merger or acquisition will bring about crude methods of integrating the two companies."
Another factor in brokers' deliberations is that the time hasn't been right to sell.
Walker believes "individual brokers' situations will dictate their "right" time to sell. She adds: "In our experience brokers have sold for a variety of reasons including: retirement and lack of succession planning; pressures and costs of legislation; lack of desire or financial resources to invest in the future development of the business; and inability to generate necessary future growth."
She also highlights "the increasing trend for the commercial broker to concentrate on commercial business and divest their higher maintenance, lower margin personal lines accounts."
But brokers seem keen to do a deal. To put it bluntly, concerns about client retention, customer service and managerial clashes were jettisoned if, as one honestly put it, if the suitor "offers enough".
Walker agrees that money talks, but cautions: "Since it's usually their retirement fund, then yes it's easy to see the reasoning for this.
"But if they thought their staff and customers weren't going to be looked after equally well by each potential suitor, then we're sure they'd consider the top three factors in conjunction with each other."
She counsels brokers to make sure they "understand the outline structure of the proposed transaction including the purchaser's intentions with regard to customer service and continued employment of staff."
So is there any chance of Swinton moving off the acquisition trail? No, says Walker: "We see the continued acquisition of quality well run businesses to be an integral part of our strategy for the foreseeable future."
WHAT THE BROKERS SAID
Q: What general comments do you have on M&As in the broker market?
"All in favour if the price is right"
"As the average age of brokers increases it is inevitable that mergers will increase"
"Consolidation is inevitable but what will change is insurers buying to control distribution channels"
"Inevitable. Small brokers are struggling with the cost and complexity of FSA regulation"
"The growth of organisations such as Towergate is deeply worrying and threatens independence of the market"
Q: What implications do you foresee for brokers as a result?
"A reduction in overall broker numbers to around 2,500 actual trading brokers"
"Bigger brokers invariably provide poorer personal service" "The challenge is to reverse these declining standards"
"Smaller market, with bigger players - bad news for the customer"
Q: If you decided not to proceed, why was this?
"Earnings ability at present good and suggested purchase multiplier not high enough"
"I still feel that we have growth potential in the business"
"Terms indicated way too low"
"Didn't share same vision, undervalued, no specific immediate benefit apart from payout to founders"
"Did not feel they could cope with client needs and could not offer the service."
Q: Have you any concerns about the managerial issues that could arise following a merger or acquisition?
"Management of the acquired business need to be totally committed to the change or staff moral and customers will suffer"
"Acquisitors, by their very nature, tend to be aggressive in their style and outlook"
"Very important that acquiring company is keen to retain the whole book of business not just what suits their commission deals best"
Q: Have you any views on the customer service and retention issues that might arise as a result of merger or acquisition activity?
"Almost certain to decline"
"Experience shows service deteriorates and retention suffers"
"Client perception and the maintenance of service standards during the acquisition period is of prime importance" "We have seen examples of very badly handled mergers that have led to business being lost"
"Customer service will, inevitably, suffer due to the injection of extra work and the substantial 'bedding in' period following a merger or acquisition"
Q: Have you any particular perceptions of acquirers of broking businesses?
"First priorities tend to be to make a lot of cash"
"The approach is often crude and it is damaging to our industry"
"They want to get it for as little as possible and are looking to maximise the return on their investment almost immediately"