Wholesale broker acquisitions seems to have been put on the back burner in the current economic climate. However, Leigh Jackson looks at the trend developing for entire teams to jump ship and move to rivals.
Wherever you look in the insurance industry at the moment, team hires seem all the rage. Having already acquired a global property team from Travelers to diversify its offerings and spearhead a growth campaign, Andreas Loucaides, the new boss at Jubilee, has told Post he is keen to attract more willing bands of underwriters on the lookout for a fresh challenge (see p12). And this trend is far from limited to insurers. UK brokers seem even more intent on pursuing the group hire option in a bid to meet their expansion targets.
For the time being at least, wholesale broker acquisitions seem to have been consigned to the history books. As Bill Cooper, managing director of financial institutions at Lloyds TSB Corporate Markets, told Post in April, even the large consolidators, such as Towergate, Oval and Giles, simply no longer have the cash to continue their buying sprees (Post, 16 April 2009, p1): "The days of these businesses going off and doing big acquisitions at two-and-a-half times brokerage or 15 times earnings are gone for now, because virtually none of them have the cash or capacity to do that."
Stepping up efforts
In its place, ambitious brokers, with a determination to grow even in the current economic climate, appear to have stepped up their efforts to hire groups of business-generating individuals to boost income. Over the past 12 months, a number of intermediaries have approached teams of brokers at rival firms and lured them across to their 'greener grass'.
In November 2008, Frank Murphy, chief executive of THB, told Post that the intermediary would be unlikely to follow up its acquisition of PWS with further wholesale purchases but would instead focus on team hires and bolt-on buys for its international operation.
And last month, similar headlines came thick and fast. SBJ Global Risks recruited Aon Benfield's Steve Ford and Simon Laycock to form a new binding authority team; Lloyd's broker John Holman & Sons revealed plans to acquire more underwriting and broking teams by targeting 'disaffected' individuals, after recruiting a team from Lucas Fettes; and the property and commercial division of Barbon announced a major recruitment drive, offering lifetime equity on all business generated and retained by new senior staff tempted to join.
In the opinion of many, the reason for the shift is financial but this does not seem to be the sole consideration for the apparent increase in team acquisitions" nor is it necessarily a new development. Andrew Holman, chief executive of John Holman & Sons, explains that the lack of wholesale acquisitions could also be a question of timing.
"Broker consolidation has been going on for so long that, realistically, any broker who wants to sell would have done so by now," he says. "All along there have been firms looking at opportunities to take teams rather than buy entire brokerages."
The strategy and direction of a business is fundamental to any acquisition, and with many brokers looking to focus on client retention and small-scale client growth, some are increasing their recruitment of teams and individuals to ensure that they can continue to increase their revenue.
"Most of these businesses are focused on retention of clients and retention of business because that's what drives their revenues," Mr Cooper explains. "Some are recruiting more account executives, so they have better coverage on the ground.
"You also need to acquire new clients" and team hires are a development of that. If you can hire people that bring business with them there is limited upfront cost and it should help at a time when you are desperate to retain as much revenue as you can."
The acceleration in team hires has also been helped by the fallout from large-scale mergers and acquisitions, with some teams feeling they no longer fit with the new direction of the combined business and actively seeking new homes.
"Where an acquisition occurs it is usually a good place to go and look for teams to find people who have been destabilised," explains John Mitchell, managing director of executive headhunter Mitchell & Partners. "Often in those situations people will sit it out but there will always be fallout."
While disaffected teams may become available due to M&A activity, any new arrivals must be able to fit with the acquiring company's overall strategy and direction.
Howden is another intermediary currently looking to expand its reach with the arrival of new teams and, for the broker, ensuring that the team fits the business is crucial. Tim Coles, chief executive of Howden, says: "A firm such as ours has a very clearly defined strategy; we know exactly where we are going in terms of the lines we wish to diversify into and lines that we wish to reinforce. So we will actively look to support development in those lines through acquisition of individuals and/or teams."
Strategy is often earmarked as the most fundamental reason for acquiring a team, with new arrivals typically being expected to operate in either a specialist area or a geography in which the broker is trying to increase its footprint.
Earlier this month, Hampshire-based broker Barbon pledged to lure more teams to the south coast and Nick Sharp, managing director of its property and commercial division, says that both geography and the nature of the teams' business are vital to its growth. "At the moment we are in patchy and disparate locations but we will have a London office in the next three months, so we could start looking for a team in the area," he says. "The regional opportunity exists but it is also about what the specialism is and whether it fits with what we do."
Mr Cooper adds: "If you are running a broking business, you would be trying to find people who could service either the region, to increase market share, or possibly specialist teams that can service the clients you have already got better, or with a wider variety of products. To make more of the existing client base is important."
And it is not just the strategic fit of a team that has to be considered. Many wholesale mergers and acquisitions fall down after they are completed because cultural differences do not allow for effective integration" and teams are no different.
"Hiring a team comes with some risks," Mr Cooper continues. "A team can sometimes be more loyal to itself than the company that it is working for. Integrating a strong individual team into a business can be quite challenging."
So, once a broker has decided that a team would fit in both a business and a cultural sense, how can it be persuaded to make the move?
As mentioned above, Barbon's recruitment strategy is to offer senior staff that join lifetime equity on all business generated and retained by them as a significant sweetener.
"If I had been with a business for a long time and there was no equity stake for me and someone was offering me an opportunity in the form of equity benefits I would take it," says Mr Sharp. "With equity you have the opportunity to take a greater financial stake than you would ordinarily get as an employee."
But with the economic climate such as it is, the situation is more complex than it would have been during times of increased financial stability. "The reasons for moving are a lot more subtle now," Mr Holman explains. "People are looking at the firms they are working for and asking: 'Where is this business going? What is my role going to be in its development?' A few years ago it was a case of people being enticed by bigger financial packages but now it is more about stability in an organisation, longevity, recognition, reward" and whether your skills have an input into the future of the business."
Even when a firm puts together a package worthy of poaching a team from a rival there is always the chance that any potential move could be kicked into the long grass" at least in the short-term" by employee duties and restrictive covenants.
Every employee of a company is under a duty of fidelity and good faith, which means they must act in the interests of their employer. In addition, company directors have a higher duty to act solely in the interest of the company and not in their own interest. Simply signalling to move to a rival, with the threat of taking your business with you, could lead to a significant contractual breach.
Peter Doyle, partner at employment law firm Doyle Clayton, says that the courts take a dim view of such actions and have the power to grant injunctions delaying hire and levy large fines. "If a broker decides, before they resign, to ask key members of their team to go with them, it could lead to that branch of the broker imploding overnight. The courts are saying that if you behave in this way it is a breach of loyalty," he says. "Every employee has a duty to act in the best interest of their employer and you can't act in the best interest of your employer if you're effectively competing against them."
He adds: "The law has come down hard on people who indulge in such team moves. One of the problems for the new employer is if they have conspired to bring that team across they are likely to be liable for the breach too." The same can be said of restrictive covenants, which could stop brokers working for a certain amount of time after leaving a company" or could prevent them taking business with them.
Mr Doyle explains that the courts have recently taken a more vigorous approach to upholding covenants. "The reason the courts were previously reluctant to enforce these covenants was because they saw it as the little man against a big company," he says. "However, once they saw that some were very worldly people in their own right, the situation changed. It is big business and involves taking assets. It can't be right that one company can strip another with no consequence."
But there are ways of facilitating team moves without breaching covenants or contracts. One option is offering a financial package. Peter Hillman, chief executive of recruitment consultancy Hillman Saunders, explains that potential opportunities exist for employees to be formally bought out of their contracts.
"If sufficient finance is in place you could essentially buy yourself out of your obligations, which would allow you to trade with clients immediately after leaving," he says. "It is almost like a management buy-out type arrangement but would involve moving a team from one business to another."
Open discussions between companies can help avoid a messy departure and, according to Mr Hillman, this could open the door for mediators, who could even help finance a buy out, to become a part of the process. "Working with an adviser who can help finance team exits and liaise with future employers to agree equity involvements is entirely possible," he says. "And this is due to the possibility of enhanced legal action against teams who decide to switch brokers. Companies do not like to see a great slug of their business just walk out of the door."
While there are obvious problems" and significant attractions" attached to team hires, they have always been a part of the broking landscape and look set to continue being an important means of expansion. And perhaps once stability returns to the market they will be met with the return of the wholesale acquisition.
As Mr Coles says: "Wholesale acquisitions won't drop for long because once a more settled economic environment begins to emerge then things will start to happen. There are always going to be people who want to exit a business or want to encourage other shareholders to join and there will always be people who want to acquire them."
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