Analysis: Where will M&A hungry global brokers look next?

Noises are being made which suggest major global brokers want to spend big on acquisitions.

In the wake of Marsh completing its $5.6bn acquisition of JLT in April, both Aon and Gallagher used their Q1 results calls to signal to the market their M&A firepower for the year ahead.

Gallagher management told analysts that it has total M&A capacity of $1.5bn even before stock had been added into the mix. While Aon’s group chief financial officer Christa Davies revealed the company currently has the largest M&A pipeline in the company’s history, with the capability to raise more money through debt refinancing.

Olly Laughton-Scott, founder of insurance broking M&A advisory firm IMAS, said the Marsh-JLT deal had led rivals to reassess their positions.

“There’s no question that if one mega-deal happens, then everyone thinks about their position,” he said. “Everyone thinks the opposition has taken a step up and what’s our competitive response to that.”

Aon-WTW

Already this year Gallagher has spent $350m acquiring Stackhouse Poland.

But in the ‘mega-deal’ space, talks for Aon to acquire Willis Towers Watson broke down.

Laughton-Scott explained while ‘mega-deals’ on the surface make little sense, they can be valuable for a firm’s stock market price.

“When you’re doing a mega-deal it’s largely driven by size and the stock market,” he said. “Stock markets tend to value larger businesses more highly, and there are good reasons for that - there is less competition, they are more stable and they can get better funding rates.” 

While unsurprised the merger failed to materialise, he didn’t rule out a deal getting agreed in the future.

He added: “Those types of discussions are often prompted by other market activity, and then often they don’t happen because the logic was never sufficiently compelling.

“The fact it became a focus of their minds doesn’t mean it makes sense. So, it doesn’t surprise me that this deal didn’t go ahead, but it would be a factor in the future that it might go ahead because they see a more concentrated market.”

Willis Towers Watson has subsequently agreed to spend $1.2bn on acquiring direct-to-consumer health care organisation TRANZACT in the US, with the integration of that business expected to continue into 2020.

Marsh is also expected to be preoccupied with integrating JLT.

Private equity

“What happens is that by Marsh buying JLT it probably takes them off the acquisition trail for a while because they’ve got to get their own businesses sorted out,” Laughton-Scott added.

“If Aon had then bought Willis Towers Watson that would have resulted in a long period of consolidation and a reduced appetite for the medium-sized boys.”

As Aon decided against acquiring Willis Towers Watson, Laughton-Scott suggested it might now look to a private equity-owned medium-sized broker, as Gallagher had done with Stackhouse Poland.

“If the Aon-WTW deal had gone ahead it would have reduced the number of buyers for the medium-sized players. The very fact it hasn’t happened means interest in private-equity owned firms will continue to be high,” he said.

Market commentators had singled out Aston Lark as a business that might suit Aon. Since the start of the year private equity house Bowmark Capital had been looking to sell its stake in Aston Lark. But last week’s completion of a deal with Goldman Sachs now takes them off the market for the foreseeable future.

Laughton-Scott said that for private equity houses, the completion of mega-deals like Marsh-JLT may make them delay sale to a trade buyer for around 12 months, as there are fewer potential buyers, creating a softer market in the short term.

It could put off the owners of the likes of PIB or GRP agreeing a deal in the short term, and Laughton-Scott said the major global brokers were unlikely to show interest in smaller firms.

“The very large companies aren’t very good at making smaller acquisitions, and indeed as they get ever larger they become less good at it, because their ability to look at detail just gets lost,” he said.

Stock market value

Private equity houses have seen the opportunities to bundle up smaller firms under one business, and Laughton-Scott said these were far more adept than brokers at completing these types of acquisitions.

He added: “What the major global brokers have typically done is not bought much small stuff, possibly with the exception of Gallagher, which is a more entrepreneurial family-led business.”

In part Laughton-Scott suggests that the thinking behind Aon and Gallagher revealing to the industry their M&A appetite is to ensure they are in the frame if brokers do look to sell up.

He said neither Aon or Gallagher would be desperate to complete acquisitions in direct response to the Marsh-JLT deal, and said a better solution for these firms could be using the funds to buy back shares.

This increases a listed company’s earnings per share, which is often how businesses are measured on the stock market, and is something Aon has already suggested it is looking to do this year.

“When you’re looking at acquisitions, if an acquisition gets too expensive, a better solution is often to buy back your own shares,” Laughton-Scott said. “This puts a ceiling on what firms will pay for acquisitions.”