M&A to become buyers’ market from 2015
Divestment has overtaken acquisition as the top type of M&A activity expected over the next three years, prompting a shift from a sellers' to a buyers' market.
According to the latest annual M&A report from Towers Watson, published today (20 October), the percentage of respondents to its survey who were considering divestment in the next three years rose from 20 percent a year ago to 62 percent.
By contrast, those expecting to acquire fell from 69 percent in 2013 to 42 percent this year. There was also a marked increase in those expecting to merge from 4 percent in 2013 to 51 percent in 2014.
"The expected increase in sellers and expected decrease in potential buyers may shift the advantage away from sellers and back to buyers, and could lead to downward pressure on divestment valuations," the report said.
Much of the divestment drive originates in the EMEA region, where Europe-based carriers continue to be focused on cutting costs and shoring up their capital positions.
Most respondents felt that 2014 would match 2013 for the number and value of M&A transactions. There are three main drivers behind this: new sources of capital entering the market, considerable consolidation opportunities and strong operational reasons for looking at acquisitions.
Private equity was cited as the main provider of capital, with 82 percent of respondents saying they thought it would be one of the top three sources of cash over the next 12 months. The attraction for this third-party capital is that the insurance sector is expected to outperform many other areas of the economy thanks to its cash-generative growth features. The growing role of sovereign wealth funds was also highlighted by 29 percent of carriers.
In terms of operational features, many cited the need for better distribution channels and infrastructure, particularly in the digital space, as key when determining the attractiveness of acquisition targets.
However, the report also highlighted the variety of obstacles that had prevented a number of deals - particularly higher value ones - from going through in 2014, which would need to be overcome in the years ahead. The volatile economic environment was seen as the biggest obstacle, according to the report, with more than half of carriers saying it was among their top three concerns. This was followed by uncertainty around regulations and concerns about getting access to funding.
Somewhat surprisingly, the price expectation gap slipped in importance from second place to eighth place in one year. Only "soft consumer demand" attracted fewer responses. Finally, the Lloyd's market in particular was highlighted as having great potential for M&A activity in future.
Its principal attractions - its credit rating and security, along with access to a centralised marketplace - has brought in transactions from Asian insurers in particular during the past year. More than three-quarters of respondents - 76 percent - saw this as a positive development, not least because it meant there was a less compelling case for alternative exchanges.
And when it comes to gaining access to Lloyd's, 60 percent of respondents said it was easier to acquire a syndicate than set one up from scratch.
One UK-based head of investment noted: "This is especially the case for foreign firms as they are less burdened with the regulatory norms and their capital requirement - or let's say expenditure - is lower in comparison to a start-up."