When a global, publicly traded insurer makes an acquisition, its share price generally outperforms the insurance-industry average in the short term, but two years down the road, the acquisition provides no average valuation premium compared to insurance stocks overall, a new analysis says.
Towers Watson, using data extracted from its ongoing Quarterly Deal Performance Monitor, says, for deals that occurred between 2008 and 2013, acquiring companies' share prices performed 4.2 percentage points better than the industry average in the short term. The short-term gains were shared equally among life, property and casualty and composite businesses, Towers Watson says.
Regarding the immediate bump and then the lack of impact on share price after two years, Jack Gibson, Towers Watson's global lead for insurance mergers and acquisitions, tells PC360 he believes acquisitions, particularly in insurance, come with a much longer-term view. The initial bump, he says, likely is recognition of the potential upside of the deal. While that initial bump may level out over the next two years, Gibson says that is not necessarily a sign of anything going wrong, but rather a reflection of the reality that it takes time build capabilities and realize the ultimate long-term benefits of the acquisition.
This is especially true of acquisitions outside of the acquiring company's home country. Gibson notes that such deals may cause an initial bump in share price due to favorable views about the deal, particularly given the current focus on the importance of diversification in the insurance industry. But he says such deals also come with more volatility. “It's a longer-term play in terms of trying to build capabilities; to deal with transitional issues in terms of realizing expense synergies. Some of these things take more time the more complicated the deal is relative to the existing entity,” he says. The purchase price in such acquisitions, he says, can reflect a 10-20 year vision rather than two years.
Towers Watson says the “most favorable share-price outcomes resulted from acquisitions completed in the acquiring company's own country. Deals of this type typically led to an excess return for investors of 8.3 percentage points in the short term and 7.9 percentage points in the two-year window after completion.”
Gibson says in a statement this reality reinforces the notion that “it's easier to generate returns in a market you understand well. It also corroborates the finding from our recent survey of over 250 global insurers' M&A intentions of a home bias when looking at the relative attractiveness of various markets.”
He adds, “Acquisitions have been and will continue to be a successful growth strategy for a number of insurance companies, but to achieve the desired financial returns, there is still the need for a deep, advanced review and understanding of factors such as the longer-term strategic fit of the target, variations in competitive and regulatory environments, retaining talent, and the requirements related to systems and technology.”
Gibson tells PC360 the actions that occur in the years after a deal is made are just as, if not more important than paying the right price when the acquisition is executed, particularly when a deal is made in another country. “There's a lot of complexity and a lot of things that have to be done right over an extended period of time” that are “super critical” to the overall success of the deal.
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