Acquisition guru Kieran Marsh explains the levers that are driving consolidation, consolidators' failure to grow organically, and the looming threat of the FSA on goodwill.

Few people understand acquisitions better than Kieran Marsh. The man behind countless deals, both past and present, he is ideally positioned comment on the prices being paid for brokers.

Are they, like many have suggested, excessive?

“Not unduly,” he says. "If you move on from a year ago, we’re at a situation where there are still a few quality brokers available."

He adds that the key drivers in most deals are synergies, products, and people.

“It’s definitely a sellers market,” he continues. “But there are some unrealistic expectations out there, with very average brokers anticipating very large multiples.”

Sage advice
To make his point, he invokes the wisdom of a man who has concluded scores of successful deals, and has became the richest man in the world as a result.

“As Warren Buffett said: ‘It’s great to buy a good company at a fair price than a fair company at a good price'. That still applies.”

Marsh suggests that the credit crunch has had a distorting impact on consolidation – and, in turn, the consolidators.

More interestingly, he argues that the smaller players have been hit the hardest.

“Consolidators have demonstrated an inability to combine organic growth with integration of acquired business. This has affected [their] bottom line.

“Brokers with facilities in place with clearing banks are seeing them being pulled due to the sheer shortage of liquidity".

Another curtailing influence – as evidenced by Towergate’s recent announcement it would be scaling back its acquisitions – is the question of integration.

“That’s a major problem,” he notes.

“There are some prime examples out there. Consolidators have demonstrated an inability to combine organic growth with integration of acquired business. This has affected [their] bottom line.”

Goodwilling
A key consideration for the consolidators is goodwill, intangible assets placed on a company’s balance sheet when it makes an acquisition. As of earlier this year, goodwill must be excluded from businesses' solvency requirements.

Marsh warns that an unconnected FSA initiative, Treating Customers Fairly (TCF), could prove the spark for the regulator taking acting action. The distraction of the credit crunch has tied their hands, he says – for the time being.

“Many brokers fail to recognise that when the FSA pop in to see them about TCF, they are going to look at other areas of the business like client money and goodwill. There’s a slightly myopic view that there are going to go away.

“If someone thinks they are under the radar, and have been non-compliant, there will be no hesitation from FSA to name and shame. The ramifications will be severe.

"I think we’re going to see action by the FSA as [their] returns coming in and the goodwill is extracted.”