M&A still a focus for AJG after collapse of Aon – Willis deal

Arthur J. Gallagher (Gallagher) will continue to pursue its strategy of adding incremental acquisition opportunities as a way to grow its business, despite the Aon – Willis Towers Watson (WTW) deal collapse which has removed a potentially transformational deal opportunity from Gallagher’s reach.

Gallagher was lined to acquire a range of assets from Willis Towers Watson as part of the divestments needed to seal the Aon and WTW merger.

Now, with that Aon and WTW merger abandoned, the potentially transformational acquisitions of reinsurance broking unit Willis Re and a range of major corporate broking units from WTW have been ripped away from Gallagher, but the CEO of the company did not sound overly disappointed in announcing his firms results yesterday.

J. Patrick Gallagher, Jr., Chairman, President and CEO of AJG explained, “During the second quarter, our core brokerage and risk management segments combined to post 17% growth in revenue, of which 8.6% was organic revenue growth; net earnings margin improved by 106 basis points; and adjusted EBITDAC margins expanded by 30 basis points.  We also completed 8 new tuck-in mergers with approximately $70 million of annualized revenues.  While our proposed acquisition of certain Willis Towers Watson brokerage operations has terminated, our decades-long tuck-in merger program remains a proven strategic growth engine.”

Barely a week passes without Gallagher announcing a bolt-on acquisition of some description.

Often smaller agencies, brokerages and health benefits companies, but these bolt-on acquisitions are helping the firm to build out its global footprint, grow its revenues and increase its stature in the market, even without the transformational deals.

M&A has proven a very good way for Gallagher to enhance its presence in insurance-linked securities (ILS) and reinsurance in recent years, not least with the acquisition of ILS specialist facilitator Horseshoe by its Artex division and by taking full ownership of Capsicum Re, now having become Gallagher Re.

But the addition of Willis Re would have been a far bigger step up in reinsurance broking for Gallagher and the fact it also included ILS structuring unit Willis Re Securities would have propelled its market presence higher in ILS and catastrophe bonds as well, with synergistic ILS growth opportunities expected to have emerged.

But even without the potentially transformational acquisition of Willis Re and the other WTW corporate broking assets, Gallagher’s CEO remains bullish on prospects.

“Global P/C rates remain firm overall, and the increases we saw during the second quarter of 2021 were similar to the first quarter.  At the same time, we are seeing increased economic activity across our client base.  Customers are adding coverages and exposures to their existing policies, which is an encouraging sign for the underlying financial health of our clients.  So as clients and prospects pivot away from controlling costs to growing their businesses and attracting, motivating and retaining their workforce, I believe our talented production staff is well positioned to help our clients navigate the current environment.

“2021 is shaping up to be a fantastic year!” he explained.

CEO J. Patrick Gallagher elaborated further during the firms earnings call later yesterday, explaining that, “We were excited about the opportunity. We would have loved to complete the transaction. There are a lot of great people at Willis and they would have been a great addition to our team.”

But despite this he said, “With or without this, we remain very well-positioned to support our clients, compete for new ones and ultimately drive value for all of our stakeholders. We’re in the greatest business on earth. Our culture is stronger than ever and I’m excited about our future.”

Gallagher also explained that the doors are always open for hiring new production talent, no matter the market conditions.

He went on to say that while there are some limitations related to hiring due to the agreement it Gallagher had with Aon and WTW, those are not extensive and “generally speaking, we’re not limited in our ability to hire general production talent.”

Which suggests that while the M&A opportunities will remain a focus for Gallagher and a continued driver of growth, the company also sees the potential to benefit with hiring opportunities as the shake-out among the big three broking firms continues.

As we explained after the collapse of the Aon – WTW deal was announced, the go-it-alone challenges WTW now faces could drive a potential future opportunity for Gallagher to buy bits of its broking business.