‘Goldilocks principle’ underpins long-term value from carrier M&A deals

When it comes to unlocking long-term value in insurance carrier mergers and acquisitions, it was not the largest transactions or the smallest that performed the best, ACORD reported. Rather, “just right” deals that fell in the middle of the pack — averaging about $1.4 billion — returned the most value.

Just 52% of the largest insurance carrier M&A deals made during the past 10 years created long-term value.

To uncover what it calls the “Goldilocks principle,” ACORD studied around 15,000 deals valued at $1 billion or more that closed during the past decade. The standards-setting body then split the deals into quartiles based on size, and found that only deals in that “just right” group resulted in transaction-to-date returns that outperformed the MSCI World Index during the same period.

Segmenting the deals based on shareholder value at risk (SVAR) reveals similar results. SVAR is used to estimate a potential decline in a company’s market value and is established by dividing the extra amount paid for a company by how much the company was worth prior to the deal being announced.

“While the largest deals may garner headlines and high hopes, they typically are not the most likely ones to create value in the long term. A transaction that is too large may simply be too big for the acquirer to successfully digest,” Bill Pieroni, ACORD president and CEO, said in a release.

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For example, larger and more complex acquisitions require more attention and can draw resources away from purchasing company’s core operations.

Conversely, deals that are on the smaller end of the spectrum might not get enough scrutiny to unlock maximum value.

“Insurers must carefully consider their ability to manage existing operations without disruption, while effectively integrating the benefits they hoped to achieve by the transaction,” Pieroni said.