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When Mergers and Acquisitions Destroy Value

Half or more of all mergers and acquisitions result in decreased values of the combined entities. How can that happen? Here’s a recent example in which we were called upon to value a combined operation after an acquisition....

Every large agency we know is involved in acquisitions or wants to be. Most medium size agencies are seeking acquisitions or mergers to strengthen themselves. Many smaller agents find themselves continuous targets of other agencies acquisition marketing, getting some welcomed and other unsolicited offers that sometimes sound too good to be true.

What we don’t hear is that 50% to 65% of all mergers and acquisitions actually result in decreased values of the remaining or combined entities. How can that happen? Here’s a recent example in which we were called upon to value a combined operation after an acquisition:

A $3 Million (value, not income) agency purchases a $1 Million (value) agency. One year later the combined business is valued (the same way each was valued previously, based on the entities future earnings potential). It is valued at $3.5 Million, a $500,000 loss of value in one year.

WHY?

To find out why these happen, we collected what some of our clients told us when they invited us to help them re-connect with growth, profit and value AFTER each implemented a business combination (merger or acquisition).

So much time was taken by management in the consolidation that we forgot to sell some insurance.
In the attempt to “integrate” one organization into a larger organization we destroyed the creativity and chased way the innovators that attracted us to the acquisition in the first place.
We never communicated properly with our employees and with our customers. We knew what we wanted to do in the merger, but we never shared our goals and strategies with the folks who we count on most to make us successful.
We consistently searched for and found weaker or failing companies that we could get at a bargain. They imbued us with their negativity. It turns out that it wasn’t such a bargain after all.
We were two companies, both facing their own institutional problems, that merged creating a single, larger troubled company.

How do you avoid this scenario and still grow through mergers and acquisitions?

Plan your organizational growth STRATEGICALLY. Don’t even consider merging or acquiring unless you have determined that it fits your long term goals as an organization. What’s “long term”? At least five years and often 10 years. Does it make any sense to take on the responsibility for a merger or acquisition if you have just a few years before you want to retire? It may sound great to retire with a larger book of business under you, but are you ready for the work of integration at your stage in your career? Do you have the staff to handle a transaction now and again when you retire? Do you have your own perpetuation plan in place? However if you have a cogent Strategic Plan that identifies the market trends that you are pursuing (product, carrier, lines of business, geography) and expansion through merger and/or acquisition will help you reach those goals, then go for it!
The only agencies who should be considering mergers or acquisitions are ones who already understand their customers’ needs are meeting them. Don’t lead with your weaknesses, lead with your strengths. An agency ready to acquire or merge has customer retention rates consistently above 90% (better at 95%). This means that you have strong customer loyalty and they “want” to stay with you. You lose them when they retire, die or sell their businesses. An agency ready to buy and merge experiences growth through referrals and wants to multiply their referral strategy by forming similar relationships with a whole new set of customers for whom they can offer similar services.
Benchmark yourself. Do you know how you stack up against similar sized agencies (overall, or in your State)? Do you keep records of your own productivity growth historically? If you don’t know yourself, how will you know if an association with another firm improves or decreases your metrics? We’ve known for years that we pay attention to what we measure. So if all we look at is commission dollars, we might beat ourselves unmercifully when our revenues decline in a period of soft insurance economy during which the market depresses by 10% or more in a given year. Agencies that pay attention to their own metrics understand and react to market fluctuations but measure the real signs of growth or shrinkage, customer counts.
Are you like the Buggy Whip manufacturer who bought up other failing buggy whip manufacturers as the automobile gained leverage on the personal transportation industry or could you expand into other categories of your industry? Most of our readers are insurance agencies. Have you looked to your merger or acquisition appetite for other dimensions in our industry beyond personal and small commercial lines property/casualty insurance? If not, consider Dimension Extension within your strategy for growth.
Don’t acquire or merge beyond your physical (or staff) capabilities to manage that growth. We encounter agencies every year that acquired or merged with the “hope” that they would gain the skills and talent to manage the resultant organization because they knew their own weaknesses. If you don’t have the strength to integrate and manage the combined operation, do your Due Diligence (including long term employment commitments) for the management and other talents needed to bolster your organization.
Define your technical competence before you venture into acquisition. We recently encountered a young Personal Lines agent who had the means and desire to acquire. But he wasn’t computer literate enough to understand his own basic agency management system. Nor did he have (or understand) the need for Internet presence for agencies expecting to remain in the personal lines business for more than one more generation. The more technically competent you are and the more you understand the relationship between internet technology and the customer in a service industry like ours, the more likely you are to make and implement successful acquisitions. The world is changing – quickly. You needn’t change to continue your career. But you can’t grow by acquisition or merger without a deep understanding of technological strategies around customer portals and remote access service.

There is a subset of large, medium and smaller agencies whose owners and drivers are prepared to plan for growth instead of following every scent toward potential acquisition or merger “prey”. The untrained ‘nose’ may find the scent may turn into a vicious odor once they pounce on their target. But if you take the time (before you acquire or merge) to strategically plan for your growth; if you understand and please your current customers; if you know your own metrics and benchmark yourself to assure that you are efficient and effective enough to enjoy value growth in a merger or acquisition; if you have examined your products and what will be the successful insurance products (or financial security products) of the future; if you have strong management and staff and if you are technically savvy, you are well prepared to enter the fray. Seek a merger or acquisition and gauge your success in the baseline terms of value to you over time. Otherwise, gain knowledge and get assistance BEFORE the acquisition or merger to keep from following a proverbial “skunk” down a hole (your worst case scenario occurs if you actually catch it).

Reprinted from the PIPELINE, the national newsletter for agency principals. The PIPELINE is published by Agency Consulting Group, Inc., a leading consulting firm for independent agents in the U.S. for over 20 years. Call 800-779-2430 for information about the content of any of these articles or PIPELINE subscription Information:

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