Often our blog focuses on a variety of aspects surrounding acquisitions. Today, we’re shifting our attention to the other half of our M&A specialty. Both insurance agency mergers and acquisitions are thriving despite the uncertain economic landscape, and mergers are an appealing option for owners who want to expand rather than sell to facilitate an exit from the business.
The Benefits of Mergers
Mergers allow agencies to combine their territories, books, services, and operations to create a new, stronger company. Rather than one owner taking control of both companies, it’s most common for each agency’s owner to retain their position of leadership in the newly created organization.
The full benefits of a specific merger will be dependent on the purpose of the merger. When we discover that a business owner has the goal to either expand, reduce competition, or strengthen their hold on a market segment, there will be specific types of mergers Springtree Group will recommend.
Types of Mergers
Vertical integration mergers create consolidation between insurance agencies and other business sectors performing a different role in their niche. For example, a health insurance provider may join forces with health care providers and pharmacy benefit managers. This dynamic is precisely what allowed CVS-Aetna, UnitedHealth-OptumRX, and Cigna-Express Scripts to gain nearly 80% of the pharmacy benefit manager market.
A horizontal merger gives two competing agencies the opportunity to join forces and expand the scale of their operations. By combining clients, staff, and resources, both companies will see a reduction in operating costs while they simultaneously give their clients the benefits that arise from being served by a more economically powerful organization.
This type of merger is also called a product extension merger. For example, let’s say Ben owns a private insurance agency specializing in offering health insurance to mid-sized companies. He wants to be able to offer vehicle policies to companies who have a small fleet, but he can’t afford to open a new location staffed with additional agents.
Emma owns a private insurance agency specializing in covering the vehicle fleets of locally-owned companies. She listens to a pitch from Ben and realizes that combining their offerings would allow each of them to offer expanded services to their target markets.
Ben and Emma decide to combine their resources, including locations and staff, and become full partners in their merged insurance agencies. Now, their mid-sized business clients can benefit from discounts when they cover their employees’ health care and their fleet’s coverage through the newly formed agency.
A conglomerate merger results from two agencies that offer unrelated services and products combining to create a new company. This type of deal appeals to shareholders who assess the market and decide that a merger will increase revenue streams and valuation of their company.
Customers will benefit from having a broad range of products to choose from, employees will have the opportunity to cross-train and expand their professional skills, and the agencies may gain new clients who desire an organization that offers this cross-section of services.
Market Extension Merger
When two agencies offer similar products in different markets, they can combine forces to mutually expand their market shares. In this way, two agencies that dominate in neighboring regions can merge, thus taking an advantageous market position across the two areas.
How Employees Benefit from Mergers
Customers and owners can clearly benefit from a well-organized merger, and so can employees. Mergers that result in larger companies can offer expanded and improved benefits, opportunities to cross-train, and potentially more geographic flexibility.
Springtree Group specializes in mergers that offer expanded business opportunities for your agency. Contact us today to inquire about funding for your merger, advice on which agency with which to partner, or information about arranging a merger that benefits your employees.