How to Successfully Acquire Your Way to $1 Billion

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Support Organic, Inorganically

While discussing the insurance industry with a friend who works at a private equity (PE) group focused on recurring revenue service businesses, I asked why they were not active in the insurance space given that the companies seem to fit their investment criteria so well.?The response I received, “we just aren’t sure how to grow these businesses organically, without the need to make acquisitions,” was unexpected to say the least.?

It was unexpected because my friend’s organization is undoubtedly acquisitive in support of their partner companies, as are most private equity sponsors.?In fact, my friend’s organization is acquiring more than one company per month as they scale one of their platform companies and being acquisitive is one of the main ways that private equity backed companies are able to drive rapid growth and create shareholder wealth, but my friend’s answer reminded me how important it is for an organization to have a solid, balanced growth plan that includes sustainable organic growth as well as an opportunistic, inorganic growth strategy driven by mergers and acquisitions (M&A).

As someone who has worked in M&A for a decade and is currently studying how to mitigate variables that lead to M&A transaction failure as a the topic of a doctoral thesis, inorganic growth through deal-making is one of my favorite discussion topics and growth strategies.?While I like to put M&A front and center, my friend, who is very good at growing companies, seemed to be suggesting that focus should be on creating a sustainable, organic growth plan first and then supporting that plan with opportunistic M&A.?

Admittedly, I thought about my friend’s sage-like words for a few minutes and then conveniently forgot about them until nearly two months later on December 11, 2018, when I saw the announcement that Acrisure’s minority investors increased their aggregate investment in the company to $2 billion.?As I read more about the increased investment, the article explained how Acrisure came to be one of the 5 largest Property and Casualty (P&C) agencies going from a zero revenue startup in 2005 to $1.5 billion of revenue today in the span of 13 years primarily through M&A.?At that point, my friend’s comment raced to the front of my mind as I, too, began to wonder how to grow this business and the other giant insurance aggregators organically, without acquiring other agencies.??

The Whole is Greater = Aggregator (Thanks, Aristotle…sort of)

“The whole is greater than the sum of its parts” is an oft misquoted tagline for synergy.?Though this phrase is commonly and incorrectly attributed to Aristotle, who actually said something similar in Aristotle, Metaphysics 8.6 [=1045a], “For however many things have a plurality of parts and are not merely a complete aggregate but instead some kind of a while beyond its parts,” I will give him credit here for sparking the idea of synergy, especially because he uses the phrase “aggregate.”7 I might even go so far as to call him the father of the modern aggregator, which is the “nom du jour” for companies that almost exclusively execute a buy-and-build or consolidation growth strategy.???Technically speaking, an aggregator is a website that generates leads, but today’s PE/Hybrid insurance agencies that are actively consolidating the industry are frequently called by the same name.

Bad puns aside, aggregating via M&A is a valid part of any good strategic growth plan and companies of all sizes can and should have M&A as part of their strategy.?While an integral piece to a balanced overall growth strategy, the article and my friend’s response caused me to begin wondering if growth predominantly driven by M&A activity was sustainable over a long time horizon and, if not, what the end-game is when the strategy is no longer sustainable as a primary driver of growth.

Insurance, Pac-Man? or Both?

Acrisure is just one of several enormous insurance aggregators with combined P&C revenue in excess of $5 billion that have experienced tremendous growth primarily driven by M&A: HUB International, Lockton Companies, Alliant Insurance Services and Assured Partners round out the 5 largest with Acrisure at #4.?The recent announcement of Acrisure’s private equity sponsors increasing their respective minority stakes in the company to a combined $2 billion (17% ownership, though preferred shares) gave me pause as I thought about my friend’s perspective and the possible end-game for this strategy.1,2

Acrisure made 92 acquisitions in 2017 and finished 2018 with 101 acquisitions, which is nearly double that of the second most active acquirer (Hub International) and brings the total number of transactions since 2014 to 334 with Acrisure being the top acquirer the past 4 years.5,9?The company management and agency partners (more than 400 individuals) continue to own 83% of the company, which tells me they are doing a lot of cash plus stock or paper deals with the promise of a bigger exit down the road.2?The PE-sponsors also have preferred equity so they receive a guaranteed return or dividend before any other shareholders receive a distribution (a common hurdle rate would be an 8% preferred return before any returns to common) and they get paid first if the company is sold or hits the skids.2

Buy-and-build, consolidation, aggregation, M&A or whatever else you want to call your inorganic growth strategy, the fact is that M&A in the insurance industry is very frothy with a record number of deals being gobbled up by a few big companies – 611 and 626 announced acquisitions for 2017 and 2018, respectively, with the top 10 acquirers accounting for roughly 60% of that volume.9?My nerd brain immediately jumps to a visual of Pac-Man clearing levels by gobbling up a seemingly endless supply of pellets, or small acquisitions, while grabbing the occasional power pellet or larger acquisition along the way.?At some point, there are no more pellets to gobble and the levels have all been cleared in Pac-Man and the same will be true of the insurance industry consolidation.?So what then??

Personally, I think this model makes an interesting case study.?I also happen to think this model is not sustainable over the next decade, despite Acrisure’s 13-year run of success to date, especially as the aggregators continue to double or triple revenue every couple of years while the industry becomes more consolidated as a result of the record number of transactions.??

M&A: The GMO of Revenue Growth

Both organic and inorganic growth are important in an overall strategy, but inorganic growth through M&A accelerates an organization’s growth by leveraging capital as a catalyst to acquire competitors, partners, customers, technology and more.?Because it accelerates growth artificially and increases the ROI or yield to shareholders, one could think of using leverage for M&A as being similar to using genetically modified organisms (GMO) to increase the the yield of a crop in farming and food production.?Though the article mentions organic growth, which I am sure the aggregators do have to a lesser degree, it is clear that Acrisure’s revenue leap the past 2 years (from $650 million to $1.5 billion) is due to M&A driven inorganic growth.?Acrisure completed 181 total acquisitions to get to $650 million of revenue by 2016, with 119 of those being completed in 2015 and 2016, and 193 reported acquisitions to get to $1.5 billion of revenue by the end of 2018).2, 9

If we examine only Acrisure, which was started in 2005 for the purpose of acquiring independent shops (industry consolidation) and made 17 acquisitions prior to Greenhill Capital Partners making a minority equity investment of $20 million in 2010 (a smaller check for them today, perhaps not at that time) when Acrisure had approximately $350 million of premiums that likely translates into $35 million to $40 million of revenue (my personal estimate, but also indirectly confirmed in a 2015 report by Insurance Business Magazine5).?The acquisition rate was 3-4 per year to go from presumably zero revenue in 2005 to the $35 million to $40 million of revenue in 2010.3, 5?

For those keeping score at home, that’s 17 acquisitions to $40 million of revenue or a touch over $2 million of additional revenue per acquisition.?

Acrisure then made 26 additional acquisitions while backed by Greenhill before being acquired by Genstar Capital in 2013, which is 8-9 acquisitions per year or 2-3 times Acrisure’s previous deal volume.3?The transaction amount was not publicly disclosed, but we know Genstar acquired a controlling stake in Acrisure from the language “acquired” rather than “invested” and since Genstar’s minimum equity check is $50 million and Acrisure’s revenue at that point had doubled to $80 million, we can state with a fair degree of certainty that the total enterprise value was within the range of 2.5 to 3.5 times revenue, or $200 million to $280 million (unless an enormous revenue multiple was paid, which could have been the case).4, 5

Again, for those keeping score at home, Acrisure’s deal volume increased by more than 50% in order to double revenue a second time and the average deal size actually dipped to an average increase of $1.5 million of revenue per acquisition.?

After 138 additional acquisitions supported by Genstar (a whopping average of 46 acquisitions per year and 181 total since being founded in 2005), the founder, Greg Williams, then executed a management-led buyout (MBO) alongside various minority equity investors (the same investors who just recapitalized Acrisure again increasing their combined stake to $2 billion on a $7 billion valuation).?The MBO paid Genstar $2.9 billion in 2016 with Genstar continuing to hold an equity stake in the business ($650 million to $700 million of revenue at that point so Greg paid over 4x revenue).6?

If the estimated entry valuation for Genstar was even remotely accurate, this represents an amazing exit multiple north of 10x in 3 years and a tremendous creation of shareholder wealth on the partial exit, which will only continue to increase since they still own a stake in the company.?Even if the estimated entry valuation was extremely low and Genstar paid 5x or 10x revenue, the exit multiple is still a top quartile result and this completely ignores the used of financial leverage (debt).?

To update the score, Acrisure’s annual deal volume increased to nearly 4 acquisitions per month and was greater than the total number of deals they had done in the previous 8 years combined.?This M&A activity took Acrisure’s revenue from $80 million to $650 million, which is an average increase in revenue of just over $4 million per acquisition ($570 million total revenue increase) so both deal volume and size increased with Genstar.?

As previously discussed, Acrisure’s revenue has again more than doubled to $1.5 billion in less than two full years since the management buyout with 193 acquisitions or 96?deals per year providing an $850 million total revenue increase.

The final score update brings us current to the date of publication for this article, which was sparked on December 11, 2018, and shows Acrisure’s deal volume increase to more than 8 deals per month each representing an average incremental revenue increase of just over $4 million per transaction.??

The End-Game

Before our end-game speculation, it would be irresponsible to not first point out that the sheer volume of acquisitions being made by Acrisure is nothing short of spectacular.?Anyone who has executed one acquisition knows how difficult it is to complete a single transaction, let alone 334 in 5 years with 193 of those in a 24-month period regardless of the structure.?By achieving this feat, Acrisure’s deal team has earned some serious credit and Acrisure’s processes for identifying targets, initiating contact, maintaining an information database, managing all of their prospective targets at various stages, negotiating acquisition terms, running due diligence, funding, closing and especially integrating all of these acquisitions must be exceptionally well defined.?Deal volume like this does not happen without seriously buttoned up systems and professionals, which should be a model for others in the insurance industry who would like to model this M&A success even if at a much smaller scale.?Kudos to Acrisure’s deal team.?

?Some of the key concepts in this case study, which will be common to all of the large aggregators and to any organization with an active M&A approach, are the use of a buy-and-build strategy (consolidation), financial leverage, technological leverage, inorganic growth via M&A, valuation arbitrage, synergies (eliminating redundancies or cost savings), deal structure and very good strategic planning and execution.?All of these topics can, should and will make for articles on their own.?

Back to my original thought, which is that this represents an interesting case study and I am of the opinion that it is not sustainable over the next decade or beyond.?

Why??

Simply because the company must continue to double, quadruple or otherwise increase the number of acquisitions it makes to sustain anything close to its current rate of growth in addition to offsetting any customer attrition, which is also growing in terms of total dollars even if the attrition rate shrinks.?Alternatively, they could increase the size of the companies they are acquiring, but it looks like the average incremental revenue increase of each acquisition has held steady at around $4 million.?The problem with making larger acquisitions is that those larger shops are also actively acquiring and trying to execute the same strategy, so they may not be ready to be acquired or there may be major valuation gaps or cultural disconnects.?Valuation and cultural issues can be easily overcome if a very large organization is acquiring one that is significantly smaller, but not so much when similarly-sized organizations merge.?

Making another nerd-brain comparison, this business model is not unlike a competitive bodybuilder during and after their career.?When a bodybuilder is competing they are trying to grow and improve year after year, which involves many factors to do successfully, but for our purposes we can simplify it to eating and lifting.?In order to grow, the bodybuilder must lift continually heavier weights and consume increasing amounts of food to support their body’s basic nutritional needs, offset any excess calorie burn, plus provide a surplus to support muscle growth.?As they grow, the amount of stimuli necessary to continue growing increases, which means more food and heavier weights year after year until they can no longer grow naturally and must add new stimuli to the equation.?If the bodybuilder reduces the amount of stimuli by reducing caloric intake or resistance training, the growth will slow, stall and then reverse if the stimuli are not replaced until their body will essentially shrink back to an equilibrium point where they can maintain their muscle mass and body composition based off of the current amount of stimuli (food and exercise).?We call this point homeostasis.?

Businesses that are actively and disproportionately growing inorganically via M&A are very similar to the bodybuilder in our example.?As long as they keep feeding the organization more and more add-ons, the organization will continue to grow and become more profitable over time.?Unfortunately, there will inevitably be a time in the future where the organization will reach a point at which they can no longer support growth through M&A alone.?At that future point, customer attrition is so large and the number of acquisitions required to sustain the company’s size and growth becomes so large it is unsustainable.?The company’s revenue growth will slow, stagnate and most likely shrink (along with staff and infrastructure) back to a point of homeostasis where financial performance can be maintained without additional acquisitions unless, of course, growth can be achieved and sustained in some other way.

How likely is it that the insurance aggregators do 200 deals per year then 400 deals per year and so on over the next decade all while the industry continues to be consolidated???Will the aggregators continue to acquire increasingly larger companies at a lower total deal volume to drive revenue growth??Will they begin merging together until we end up with a few giant providers??Will insurance valuations continue to soar based off of this high volume of M&A activity or will it undergo a market correction?

Without a balanced strategy for growth, they will have to keep completing an ever-increasing number of deals to maintain the same growth rate in an industry that is becoming increasingly consolidated, automated and disrupted by both technology and political regulations.?If they stop buying up smaller shops, the growth will slow or stop altogether possibly resulting in shrinking revenues if they are not able to offset customer attrition with new business.

To the physics nerd in my brain, this looks very much like a ship approaching light speed whose mass increases exponentially until it reaches infinity, which in turn requires infinite amounts of energy and fuel to continue accelerating to light speed.?Similarly, it could be the early solar system soon after the sun ignited and the huge accretion disk provided enough material for the planets, moons and other objects to form and grow rapidly, relatively speaking, through collisions until there was eventually not enough residual material left from the accretion disk to support further growth leaving us with what is essentially our current solar system (except for Saturn’s rings, which is a fascinating topic for discussion on its own).?Go ahead, pick your own favorite nerdy analogy to apply.?

It will be interesting to watch what happens to these huge aggregators over the next 5 to 10 years once their PE-sponsors, who are driving them to grow so much through M&A, have exited and are no longer supporting inorganic growth in the same capacity.

At this size and with M&A being the primary driver of growth, the likely outcome is that they go public pretty soon or merge with another, larger aggregator since another PE shop may have the same thought as my friend and wonder how to continue growing the company.?As the ability to sustain exponential growth becomes unfeasible and the growth rate inevitably slows, whether organic or inorganic, the company may naturally shift from a growth company to that of a mature, cash flow company, which is not a bad shift especially if public.?While growth stocks in the public market get all the press, solid cash flow companies that pay investors hefty cash dividends can be a much better investment over several years or decades, just ask Warren Buffet.?

In 5 to 10 years, we might even see companies like this be half the size they are now as already difficult to win organic growth becomes even more challenging as basic insurance policies become commoditized and those premiums move to automated platforms or the same technology allows insurance carriers to go direct-to-consumer (D2C).?

With a changing regulatory environment, we might also see the companies cannibalized and sold for parts much like the companies falling victim to Michael Douglas’ character, Gordon Gekko, in “Wall Street,” or his real life corporate raider counterparts, which we now call “activist shareholders.”

Of course, I could be wrong.?

In any case, it will be interesting to see what happens when the pellets run out and the required volume of M&A activity necessary to continue this extraordinary growth becomes unsustainable.??

Summarizing the answer to the title, create a top tier M&A team, deal funnel, streamlined systems and procedures to execute hundreds of acquisitions without taking an eye off of organic growth.

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Source Websites:

1.??????https://www.insurancejournal.com/top-100-insurance-agencies/

2.??????https://www.pehub.com/2018/12/acrisure-racks-up-2-bln/

3.??????https://www.insurancejournal.com/news/midwest/2013/03/01/283247.htm

4.??????https://www.privateequityinfo.com

5.??????https://www.insurancebusinessmag.com/us/special-reports/elite-agencies-2015/acrisure-26268.aspx

6.??????https://www.gencap.com/acrisure-completes-management-led-buyout-2-9-billion-transaction/

7.??????https://sententiaeantiquae.com/2018/07/06/no-aristotle-didnt-write-a-whole-is-greater-than-the-sum-of-its-parts/

8.??????https://view.joomag.com/4q18-marshberry-ma-trends-4q18/0900176001547126254?short

9.??????https://optisins.com/wp/2019/01/december-2018-ma-report/

Pac-Man? is a Registered Trademark of BANDAI NAMCO Entertainment Inc. (and a fun way to develop carpel tunnel syndrome).??

Disclosure: The author is not affiliated with any of the companies discussed in the article.?

Opinion Disclaimer: This article is intended to be both informative and entertaining.?The views and opinions expressed by Jason Roseberry, both in this article and elsewhere, are solely the views of the author, Jason Roseberry, and do not necessarily reflect the policy, position, opinion or endorsement of any affiliated individuals, entities, employers, connections, commenters or any other person or entity other than the author himself.?Any content provided by the author is of his personal opinion on the topic being discussed and is not intended to malign, offend, endorse or support any political, religious, social, ethnic, economic or cultural group, gender, sex, orientation, club, organization, company, individual, collective, approach, strategy, planet, galaxy, universe, plane of consciousness, state of matter or anyone or anything else that could possibly find offense in the author’s opinion or attempt at humor not otherwise listed in this disclaimer.?

?? 2019 Jason Roseberry

?Any missing citations or other omissions are unintentional and the author wants to give credit for intellectual property where appropriate.?Please contact the author if any citation for intellectual property has been omitted and the article will be updated with the missing citation.