Last fall when we wrote the article about strategies for the '90s, we predicted that there would be an increase in merger activity along with a continuation of acquisitions/sales. We frequently hear about mergers, but most have been acquisitions that are merely characterized as mergers. What we want to discuss today is the true merger, a marriage where substantial elements of both organizations survive.
We divide true mergers into two categories, defensive and offensive. There is nothing inherently wrong with either approach, with the caveat that defensive mergers may not be on as solid a footing as offensive ones.
We define a defensive merger as one occurring to overcome a significant weakness on the part of one of the partners to the deal. For example, the Jones Agency merges with the Smith Agency because Jones has lost two of its three markets. Or, Jones has no perpetuation alternatives so he arranges to merge with Smith.
In contrast, the offensive merger is one accomplished to gain a competitive advantage: a marriage of two strong agencies that seek to parlay those strengths to increase their share of business in their marketing territory. While no agency is without some area that could benefit from improvement, the offensive merger has its roots in growth, not mere survival.
We have all heard of mergers that failed. And while the reasons are seldom revealed, we do not know why in some of the cases, and we will examine them now. We will concentrate on the offensive merger, but the strategies generally apply in all cases.
COMMON GROUND
First, we recommend a dozen or more visits, business and social. Include the spouses on social visits; they often get a perspective that will be helpful. A number of visits will allow you to get to know each other better; after all, you may be partners for nearly as long as some of us have been married.
As you begin the feeling-out process, start with business philosophy, integrity, and ethics. Does he/she share all of the underwriting information with the company? Does he/she believe in sharing ownership with others? Does he/she do what's best for the client first, himself/herself second? You can doubtless come up with many more, but unless you can agree on these, the others won't matter.
The offensive merger brings together agencies that have something to contribute to the new entity: producers, carriers, marketing programs, location, special expertise, perpetuation alternatives, and entrepreneurial zeal.
COMPATIBLE CULTURES
While in a sale the seller probably won't be staying around very long, in a merger you'll have your partners around every day. This leads to the next consideration, whether the two cultures will fit. Forget the mathematical calculation of adding books of business or calculating contingencies. Such considerations may look exciting on paper, but the real question is whether you can get along with each other. As they say in the marriage ceremony, '. . . not to be entered into unadvisedly or lightly.' Agency culture goes deep and it requires many visits between principals to explore areas of comfort and areas of discomfort. Some of the important areas to be discussed and examined before merging:
A. Agency Fiscal Health, including
- Aged Accounts Receivable
- Principal Salaries/Bonuses
- Agency Capitalization and Working Capital
- Short- and Long-Term Debt
B. Personnel
- Employees willing to make the agency a career
- Background, Education, and Training
- Annual Meaningful Performance Review Process
- Delegation at All Levels
- Retirement Plans, including ESOPs
C. Carriers
- Good Mix
- Good Loss Ratios
- Good Contingency History
- Willingness to Write Business
- Preferred Status with One or More
D. Management
- Some delegation to all levels in agency
- Annual budget and planning process
- A plan for and concern for perpetuation
- Some sales management and producer development
E. Sales Power
- A strong desire to produce new accounts
- Above-average size of the book of business for each producer
- A strong interest in recruiting new producers, their training and development
Defensive mergers have difficulty for all the same concerns as stated in the offensive discussion, along with a few more.
- Defensive mergers bring together partners, at least one of whom has a major weakness. This may create a superior/inferior atmosphere.
- Defensive usually signifies a lack of planning, thereby creating the crisis or semi-crisis that necessitates the merger.
- Agency fiscal health is usually poor, especially in the area of aged accounts receivable.
- One or more major carriers have terminated the agency.
- Loss ratios are poor, which means future contingencies and perhaps the ability to place business is impaired.
- Accounts are extremely price-driven and shopped each year.
- Staff is weak, morale is poor, turnover is high because there has been a lack of strong leadership.
If your potential has any of these problems, be extremely careful before proceeding.