After a record year of mergers and acquisitions in the employee benefits sector, industry observers expect 2018 to be another great year for deals, but they differ on the reasons behind the outlook. Some cite a strong economy and the desire of smaller benefit firms to band together in a market that remains complex, while others point to the recent passage of the Tax Cuts and Jobs Act.
Last year recorded a 90% increase in mergers and acquisitions among benefit brokerages compared to 2016, according to research from OPTIS Partners. Privately-owned brokerages closed on 128 deals from 105 buyers last year, up from 114 acquisitions from 87 separate buyers in 2016.
With corporate tax rates slashed from 35% down to 21% after President Trump signed the new tax law, Dave Kompare, principal and leader in Aon’s M&A practice, expects to see more M&A activity in the benefit adviser and employee insurance space due to the anticipated repatriation of overseas cash from the tax cuts.
“U.S. companies have been sitting on billions of dollars in overseas earnings and can now bring home that cash at a reduced rate. This cash could be used to help fund acquisitions,” he says. Kompare adds that the lower U.S. corporate tax rates could also spur organizations to divest businesses that aren’t core to their current strategy.
“Many conglomerates have maintained divisions because selling them would generate a big tax bill,” he says.
Hodges-Mace COO and CFO Ron Shah also believes that U.S. companies will be sending their money back to the U.S. “Rather than simply distributing big dividends from excess cash, we expect companies will be looking for ways to invest and grow their money. This should fuel acquisitions as companies seek to increase market share or add to their product portfolio,” he says.
One firm taking advantage of the M&A headwinds is Risk Strategies Company, the Boston-headquartered insurance broker and risk management firm. In January, it bought Benefits Network Insurance Agency, a specialist brokerage focused on the development of employee benefits plans, for an undisclosed fee. Risk Strategies has been on a tear buying firms at the rate of roughly one a month in 2017. In addition to BNIA, Risk Strategies recently bought three brokerages with benefit focuses: Boston-based Mosse & Mosse, Tikia Consulting, based near New Orleans; and TSG Financial on Long Island, N.Y.
Buying companies in a different region of the US and with experienced employees is the reason for Risk Strategies' M&A activity. "We're doing 12 to 13 acquisitions a year and we're looking at companies that provide synergies, expertise and expansion into areas both geographically and markets we don’t serve currently to go grow our business," says John Greenbaum, national practice leader for employee benefits for Risk Strategies Co.
That said, Greenbaum doubts that the tax reform will add fuel an already active M&A market.
“The volume of M&A deals is already very high and we believe that it will continue to be high. Some new sellers may enter the market in response to changes in the tax law, but the continued high deal volume is more driven by the continued low interest environment that makes debt financing of acquisitions attractive,” he says.
He also notes that “the number of retiring principals with highly appreciated assets who do not have internal succession plans or are unwilling to take the risk of selling internally and potentially retaining ownership or debt in their firm” could be ripe for an acquisition.
A frantic merger market
Despite believing that 2018 will continue 2017’s “frantic pace” for mergers, Brian McNeely, partner of insurance market research firm Reagan Consulting based in Atlanta, doubts that the lower tax rates will boost the number of mergers and acquisitions among insurers and benefit brokers, per se.
“I’m not sure there will be a material increase in the number of transactions done and the prices paid,” he says. He notes that the current structure of many of the acquirer firms could be C-corporations or a private equity-backed firms, and that any savings they receive from the tax cut might not be enough to spur more mergers.
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“Their corporate structure will have an impact on how they benefit from the tax changes but for many private equity-backed buyers, we don't know there will be a material change in their appetite or pricing” for new mergers, he says.
Some firms may change their corporate structure to take advantage of the new tax laws and make themselves more attractive for a merger.
“To the extent organizations might be looking to unlock value through the divestiture of non-core businesses, it may lead to restructuring of their organization to better position these business units for sale. These restructurings could lead to the realignment of corporate shared service functions, movement of employees and the segregation or replication of benefit programs,” says Aon’s Kompare.
That said, McNeely is expecting another record year in merger and acquisitions in the insurance and benefits space. He just doubts that the tax cuts will fuel this momentum.
“If you look at 2017, it was the most active year, highest prices on record. This was a function of general economy uptick and the general economy, as well as supply and demand health of our industry,” he says.
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