Merger & Acquisition Activity Off to a Quiet Start

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After a record-setting year-end, 2013 started off with a whisper.

First quarter merger and acquisition activity slowed to 37 announced transactions between January and March, down from 67 the prior year. Buyers were busy digesting their December acquisitions spurred by the imminent capital gains tax increase. With all deals trying to close by Dec. 31, there was little hangover in the new year, dropping January activity to 13 deals.

February perked up with 18, but March took an extended spring break with a mere six deals. Most of the leading acquirers slowed to catch their breath or disappeared altogether.

Employee benefits-only Digital Insurance was the most active acquirer this quarter, with four announced transactions. That was a strong start after completing eight deals in 2012, all in the latter half of the year. Acquired by Fidelity National Financial last December, Digital appears equipped to continue its growth and expand its market position in the employee benefits arena. Digital’s acquisitions this year established its first offices in both the Tennessee and Boston area, and strengthened its operations in North Carolina and the Midwest.

Private equity deals comprised nearly 40 percent of the total deal count in the first quarter. GTCR-backed AssuredPartners and Confie Seguros, newly backed by ABRY Partners in a secondary buyout, each announced two deals. AssuredPartners continued building a leading middle-market brokerage with acquisitions in Ohio and Kentucky, while Confie Seguros strengthened its presence in the New York and Florida markets.

As private equity-backed firms use new capital to spur growth ultimately focused on generating returns, don’t expect to see the momentum diminish anytime soon.

Rounding out the three-way tie with two deals was independently owned Leavitt Group, matching its 2012 total count just three months into the year.

The remainder of mergers and acquisitions activity was dispersed among many buyers, each with a single deal.

Arthur J. Gallagher, typically among the most active, announced one deal, compared to seven during the same period in 2012. Although perhaps that was an expected start as it finished December with an unprecedented 12 deals. Other public brokers were absent from the year-to-date tally.

Employee Benefits

The public broker absence was evident in the employee benefits space. The first quarter saw 10 benefits deals compared to 25 last year. With more than half of the 25 deals concentrated among public brokers, the lack of activity so far in 2013 looks to be a driving force behind the decline.

As many employee benefit firms assess the feasibility of remaining independent in the wake of healthcare reform, buyer demand continues to decline in the uncertain small group market. However, innovative brokers focusing on integrated health management products and services remain attractive targets, and often realize premium pricing relative to property/casualty firms.

Hub International, a typically active buyer, remained quiet on U.S.-based deals this quarter. While it did not complete any deals in the United States, the company expanded its presence across Canada with three acquisitions.

Despite ongoing economic uncertainty, consolidation likely will continue. The industry remains highly fragmented, and the appetite for quality agencies is strong. Agencies are facing pressure to grow top-line revenues and integrate sophisticated solutions, or alternatively risk becoming less relevant. While activity this year is unlikely to break any records, interest among buyers and sellers remains high, and activity is expected to pick up.

Securities offered through MarshBerry Capital Inc., member FINRA and SIPC, and an affiliate of Marsh, Berry & Co. Inc., 4420 Sherwin Road, Willoughby, Ohio 44094. Except where otherwise indicated, the information provided is based on matters as they exist as of the date of preparation. Past performance is not necessarily indicative of future results.