By Andrew Holderness Global Head of Corporate Insurance Group at Clyde &Co LLP
While some way off the peak activity of 2009, the number of completed deals globally rose in the first half of 2015 to its highest level in three years. There were 225 transactions completed worldwide and, year-on-year, M&A grew over 19 percent.
New players in town
Although Zurich’s recent decision to walk away from its acquisition of RSA illustrates how external events can impact a business’ appetite for M&A, the market is currently gripped by merger mania – there is real impetus in the market accompanied by a tangible sense of ‘buy or be bought’. The biggest shift over the last year has been the arrival of the next generation of global powerhouses from emerging economies, making significant moves into mature markets to acquire assets that can fuel their international development and growth ambitions.
In one example, Grupo BTG Pactual, Brazil’s only publicly traded independent investment bank, partnered with shareholder Abu Dhabi Investment Council to acquire Ariel Reinsurance Co Ltd in a deal worth approximately USD350 mn. The purchase represents BTG Pactual’s long-term strategy to diversify away from its core Brazilian investment banking business and expand its presence in the P&C industry outside of its domestic market.
Elsewhere, in probably the most active example of an emerging market player spreading its wings and looking to broaden out its portfolio, China’s Fosun International has made a number of purchases in North America in the last year including Meadowbrook Insurance Company and Ironshore in Bermuda. Earlier this year, the company identified insurance as its most important business segment – as a cheap and sustainable source of funding – and confirmed its plan to spend at least US$2.4 bn to buy five insurers in the USA, Europe and Asia.
But Fosun and BTG Pactual are not isolated examples of this trend. Emerging markets across the Middle East, Latin America and Asia are seeing a host of companies with the balance sheet strength and expertise to make acquisitions on the global stage.
The ripple effect
Although recent months have seen a spate of announcements of blockbuster deals – such as the monster acquisition of Chubb by ACE for US$28.3 billion – activity is now rippling down the market and, for the boards and management of mid-market re/insurers, it is impossible to ignore the question “acquire or be acquired?” Whereas this time last year the preference was definitely for excess capital to be deployed in share buybacks, now prevailing sentiment is directed towards deal activity that can deliver diversification, geographic reach and cost savings.
The search for growth remains paramount, especially for those whose domestic markets have stagnated. In 2014 there were a number of acquisitions to exemplify this trend, including Dai-ichi Life’s purchase of Protective Life for $5.6 bn. It looks set to continue with Tokio Marine announcing in June 2015 that it had agreed to buy U.S. specialty insurer HCC Insurance for $7.5 bn, in what would be the biggest M&A deal this year by a Japanese company.
Regulation too remains a driver, especially in emerging markets. The raising of the foreign investment cap in India is likely to usher in a wave of M&A while new rules recently introduced in China are starting to take effect. The Middle East, long considered ripe for M&A, is set for a combination of domestic consolidation and inbound investment as a result of legislation designed to squeeze out smaller players with weaker balance sheets.
Positive outlook
Looking ahead, although we expect M&A to continue across a range of markets, challenges remain in certain jurisdictions. Deal-making in Europe meanwhile has been patchy. A cloud of uncertainty overhangs the region, and in the UK in particular this is exacerbated by the possibility of an exit from the European Union. Many would-be deal-makers in the continent have adopted a “wait and see” attitude as a result, which is acting as a brake on transactions.
In the US, the positive macro-economic outlook in the US, combined with on-going fierce competition in the re/insurance marketplace and ever increasing levels of capital – including that from new and alternative sources – points to more M&A to come.
Although activity in Asia Pacific has fallen back slightly over the last 12 months, there has been an increase in the number of cross-border acquisitions; nine of the period’s ten largest transactions involving Asia Pacific acquirers had foreign targets. We expect this trend to continue – notwithstanding further catastrophes with the potential to cause significant balance sheet damage – amid clear signs in a number of markets in the region, as elsewhere in the world, that M&A activity is set to surge.
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