Have M&A deals peaked?

After a very active 2007, deal-makers in the insurance sector must face 2008 with some trepidation. As the above charts show, the value of disclosed 2007 deals in the £100m plus bracket reached a peak at just on £70bn while the number of deals was as high as ever. In the £10m to £100m bracket, the value of deals was again at a peak, while the number was on a par with the best earlier years. Can this be kept up?

The answer for larger deals (defined as where the money changing hands is more than £100m) seems to be a decisive no. Activity in larger deals has slowed dramatically in the first quarter of 2008, indicating that the insurance sector has been hit as hard as any other by the credit crunch and, therefore, the lack of readily available funding for acquisitions. Added to this is an inevitable lag between price expectations of buyers, who quickly adjust their sights downwards in difficult times, and sellers who continue to hang on to yesterday’s valuations.

Smaller deals (where the money changing hands is £10m to £100m) appear not to have been hit so hard, but the question for owners and advisers operating in this size bracket is whether tax incentives have been a temporary help producing an artificially favourable picture. Without the changes to capital gains and other tax (especially non domicile) rules, which produced a huge incentive to sell by 5 April this year, would the picture have been much gloomier?

Certainly our experience at Corbett Keeling has been of large numbers of deals being pushed for a pre 5 April finish. With one or two exceptions – notably the sale of a stake in Towergate to hedge fund Och-Ziff – these

tax-driven deals are of smaller businesses where the fiscal incentives are more likely to impact on owner managers. When this flood of tax-driven deals finishes, what will be left? Will the picture for smaller deals be similar to that for the larger ones, or will something else come along in place of the tax incentives?

A key feature of the credit crunch is that debt funding for larger deals has almost completely dried up. By contrast, while debt funding has got tougher for smaller deals, it has not altogether disappeared. At the same time, the fundamentals of the sector, for example the case for broker consolidation, remain as strong as ever.

So, other things being equal, our expectation is that any reduction in deal values and volumes at the smaller end should be less dramatic than for larger transactions.

A couple of smaller deals have been announced by Jelf – the purchase first of Sussex and Kent-based broker Argyll for £10m and then, within days, West Midlands broker Clarke Roxburgh for £18m. For the fleet of foot, every downturn throws up opportunities and there will still be plenty of deals to be done. IT

Jim Keeling is joint chairman of Corbett Keeling – advising on funding buy-outs and selling businesses in the insurance sector.