May 8, 2019 by Greg Meckbach, Associate Editor
Thinking about rapid-fire growth? M&A guru Georges Pigeon of KPMG in Canada gives you some food for thought
cu | What would you say to a broker who wants to sell the business and is looking for a buyer?
We usually have up-front conversations with our clients when we help on the sell side. That will include a conversation around their long-term intentions of remaining in the business. If they seek to exit upon close, then there may be certain types of buyers that are less ideal for them. If they wish to continue, then the field may be altered. So we would have those conversations about their long-term objectives. We also want to understand the attributes they are seeking in a buyer. If the seller has certain business values they are keen to perpetuate – for example, clear independence as brokers from an insurance carrier – they may prefer to be acquired by a similarly independent broker, or by a private equity firm looking at the insurance brokerage space.
cu | What do buyers look for in a P&C business? Is it the products? The people? The technology? All three?
Each transaction will differ. It will most likely be a mix of the three, nowadays. It will be clients, products and markets, as well as the people (the talent) in an organization. To some extent, the talent goes in hand-in-hand with products. For example, there may be people responsible for specialty lines and you may not find that experience on every street corner. Increasingly, if I look back over the past 10 to 15 years, technology has become a greater consideration in the mix. Some buyers may have a heavy focus on the technology that is being deployed in an organization. They may see acquisition as a quicker route to implement new technology in their own organization rather than spend a number of years — along with the risks that come with that — in developing their own technology internally.
cu | Is this true for both carriers and brokers?
In the brokerage space, we are seeing that consideration. In the carrier space, to date, we see it more when they are looking at investments in insurtech businesses, for example. But I would not completely dismiss that.
cu | Are there things that some clients fail to consider when going through the due diligence process of a merger or acquisition negotiation?
Our perspective is very simple. If we are advising the client on the sell side, we endeavour to do a thorough analysis up front, as if we were advising the buyers. That way, we can identify potential pitfalls and explain to the sellers the potential repercussions. We always hope for the best but plan for the worst. There would be considerations such as change-in-control clauses in service arrangements. There may be onerous payments to be made. In some cases, you can have some misunderstood tax risks.
cu | What are some terms that might be in a change-in-control clause?
The buyer may have a very different technology provider, and IT is often a place where significant savings can be achieved, given its pervasiveness in the back office. So, you would want to understand what those arrangements are, how easy it is to terminate them and whether there would be a cost involved. You have to think about the transfer from one IT system to a new one. It can actually go both ways. An acquirer may choose to jettison its own IT platform and migrate all of its business on to the platform of the company they are acquiring.
cu | Have you observed potential M&A deals that fell apart?
There were cases where deals fell apart. The valuations were based in part on a short- term forecast and there was a realization that it was not going to happen, or it required such a leap of faith that buyers walked away. Also, say for example that you survived all those steps; you agree on valuation and then you start negotiating terms and conditions. If the buyer then asks for potentially onerous terms, or the seller starts asking for onerous terms — and none of these things were put out on the table early on during discussions or negotiations — those types of things can make people walk away. I am seeing less of that, but it happens.
cu | What happens when a deal falls apart?
Whether you are a buyer or a seller, if a transaction failed, you need to do a really good debrief on what prompted the termination of the discussions. Transactions can fail at a number of places in the process. We have often seen this happen during the early conversations around valuations: a seller may have expectations about what they are worth, and the buyer has a very different perspective on it. And the gap is so wide, there is really no way you can bridge it.
cu | What happens when a buyer and seller don’t agree on the value of the company?
If the gap is not too wide, there are ways you can bridge it. For example, you can do this through long-term, multi-year earn-out clauses. These include milestones to achieve over time; once a milestone is reached, the buyer then agrees that further payments will be made to the seller. During the due diligence process, findings may come up that put into question the base valuation. It could be, for example, that the organic growth as first represented turned out not to be wholly accurate. The customers are not going to give you higher volumes, despite what you thought. It actually happened to me years ago on a deal. We were having conversations with the client as part of the due diligence, and our client had asked us to interview customers of the potential seller. The customers indicated they would not send greater volume to the potential seller because they wanted to maintain a healthy base of [vendors], whereas the potential seller thought that they could capture all of that client’s business.