8 Lessons in M&A Survival
Insurance Experts' Forum, September 12, 2012
With a few exceptions, there has been a relatively modest level of mergers and acquisitions (M&A) in the U.S. insurance market during the economic downturn—certainly not the flurry of activity seen in the 1980s and ‘90s. Now, thin margins, claims exposures, expense controls and investment returns are driving carriers to struggle with sustainable profitability. For that reason, M&A is quickly moving up on the executive agenda—not just as a way to grow, but as a way to survive.
For those carriers who are quickly being thrown into the deep end of the M&A pool, history has provided critical lessons learned for successfully evaluating, selecting, and implementing merger and acquisition opportunities. These include:
• When evaluating potential opportunities, stick with your core business. Many carriers have excess liquidity even now and are likely to consider “portfolio plays.” That’s fine for businesses that are already successfully operating a portfolio of companies. For those who do not, be wary of venturing into uncharted territories. Those may include lines of business which require dramatically different understanding of risk, underwriting, claims, or distribution. Experimenting with diversification can be a good thing, but take a carefully measured approach in deciding how much you are willing to put at risk.
• Prepare to move quickly. Many of your peers and competitors are reviewing the same opportunities. Those who can act quickly, accurately, and decisively will win. Those who over-analyze M&A options may find themselves watching opportunities pass them by–especially now that liquidity is so important to survival.
• Don’t be afraid to give serious consideration to businesses with seemingly unattractive operations. Operations which are not up to your standards are often the greatest opportunities for performance and profit improvement.
• Be thorough in your due diligence. The need to act quickly can also lead to overlooking key reviews. This is not limited to just deal evaluation but also final terms and conditions.
• Leverage your strong cash position if you can. Especially with today’s market conditions, going to the capital markets for funding will slow you down and you may end up ceding returns which would otherwise be better passed on to current shareholders.
• Consider IT integration issues carefully before, during, and after the deal. Before a deal can be struck, accurate and timely financial, HR, and operational data is needed. IT compatibility and dependency issues can slow business integration efforts and possibly reduce longer-term integration benefits.
• Line up the right team to execute with speed and precision. Integration is hard work and requires experienced resources to realize the benefits expected from a merger or acquisition.
• Don’t underestimate the challenges of cultural integration. There is substantial evidence which points to why mergers and acquisitions fail. The #1 reason most noted is the failure to integrate company cultures. Analytically speaking, you can pick the best target but if you don’t have the right end-state culture you won’t integrate and the projected benefits will not materialize as expected.
These are a few of the key issues you should consider as today’s market dynamics put M&A back in play. And these aren’t just hypothetical. The need for speed blended with diligence is critical right now. Market leaders will be growing along multiple dimensions that include acquisitions and divestitures, blending laser focus and nimble agility to optimize the benefits. Those unable or unwilling to keep pace will soon find profitability, pricing, and customer retention an increasingly difficult challenge.
Steve Discher is an EVP at the Robert E. Nolan Co. a management consulting firm specializing in the insurance industry.
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