As two more firms announce their plans to merge at the start of November this year, Sam Barrett reviews what appears to be a perfect pairing, while recalling a recent merger that failed to ignite.
Increased regulatory requirements and tougher market conditions are driving consolidation in the financial services market, with several big names in protection having announced their intentions to merge this year.
The largest proposed merger so far is that of Friends Provident and Resolution, which would create a company, Friends Financial Group, worth between £8bn and £8.5bn, placing it in the top 40 companies in the FTSE 100 by size.
"The two companies are very complementary," says Simon Clamp, managing director of UK sales and marketing at Friends Provident. "While Resolution has financial expertise and back books that generate a significant amount of cash, Friends Provident has a very successful new business franchise with a strong back book."
As far as protection goes, Friends Provident has its own arm, focusing on both individual and group business, while Resolution, although generating little new business, maintains the Scottish Provident business and bancassurance through Abbey. "We'll continue to run the separate brands and both have plans for product development," says Clamp. "They have slightly different products but have also been targeting slightly different markets in the past."
The merger is subject to shareholder approval but, if everything goes to plan, the two companies should be united early next month. "The two boards are committed to the merger and investor reaction has been strongly favourable," adds Clamp.
Cold feet
But while Friends Financial has reached the last stage of its merger plans, another of this year's mooted mergers was abandoned at a much earlier stage. In April, Royal London and Royal Liver Assurance announced they were in talks to consider a merger. Both companies have strong brands in protection in Bright Grey and Progress respectively.
But by the middle of August, the talks had been abandoned with the board of Royal Liver deciding that, although there were considerable merits for its members, an independent strategy would be better.
According to a spokesman for Royal Liver, the stumbling block lay with the way the two companies would have had to merge. He explains: "We explored this carefully as scale is an important issue but we would have had to merge the two life funds, which would have meant demutualising, and this wasn't a mechanism that we felt would have been in the interests of all our members."
The difference in sizes between the two companies was also problematic. While Royal London is eight times the size of Royal Liver, with more than £30bn of funds under management, it has far fewer members. Compared with Royal Liver's 1.7 million members, it only has 600,000. "This makes us fundamentally different, which made the merger harder. Ultimately, we questioned whether it was worth giving up our independence to achieve something very similar," the Royal Liver spokesman adds. "We've been going through a modernisation process over the last three years and it's really in the interest of our members to carry on with this."
Although this time the deal fell through, neither company rules out further mergers or acquisitions. A spokesman for Royal London says that, although it is not aggressively acquisitive, it would look at other acquisition or merger opportunities if the fit was right. Similarly, at Royal Liver, while it is focusing on its existing businesses, it does not rule out mergers or acquisitions in the future.
Although these two examples show very different outcomes from merger talks, the protection market is not surprised that companies are considering consolidation. "It's always been the case that big is beautiful and insurers will look for mergers to give them economies of scale," says Simon Webster, managing director of independent financial advisers Facts and Figures Financial Planners.
A further driving force, according to Webster, are the shareholders. He says that with companies forced to focus on the share price, merging to bump this up can become an attractive - and lucrative - strategy.
Certainly, as companies increase in size there are savings to be had. The cost of servicing each business unit will be lower with rationalisation occurring across common divisions such as compliance and training.
It is not a bad thing for competition either, according to Kelvin Lillywhite, a financial consultant with Best Advice Financial Planning. "As long as the market has at least a few players in it there will always be competition," he says. "They want their slice by being top of the tables on the Exchange, which they achieve by cutting costs and innovating."
But while consolidation can result in cost savings and enhance competition, there can be pitfalls too. Webster says that service is often the biggest casualty when companies merge. "Unless it's the case of a large company swallowing a little minnow, service standards inevitably drop when companies merge," he says.
Adjusting to change
This occurs for a number of reasons, ranging from the business focusing on the merger rather than everyday activities to employees feeling uncertain about their position within the new organisation.
Anthony Badaloo, managing director of Hertfordshire-based IFA, Church Hill Finance, agrees that service can suffer. "There can often be a clash in the culture of the businesses, which will be felt on the service level," he says. As an example, he points to the takeover of Abbey by Spanish firm, Santander. "It wanted to axe the broker division as, without brokers in Spain, it didn't understand their relationship with the company. It changed its mind when it found they brought in a significant proportion of the business without any overheads," he explains.
Badaloo says this poor service can really affect his business. "A recent survey said IFAs were spending a day a week chasing providers, but I think this is optimistic. It's not unusual to wait six months for a life policy to be issued, which can mean we'll lose money on the sale," he explains.
As well as feelings of uncertainty and cultural differences, technology can also cause problems with knock-on effects on service. It is unusual that insurers have the same, or even compatible, technology platforms and the larger and older ones will often have a number of legacy systems ticking away in the background too. For some of the larger composites, the number of these computer systems can be in the hundreds.
"Legacy systems can really slow service down," says Badaloo. In one instance, because the person he spoke to did not know the policy he was enquiring about belonged to a company that had been acquired years before, he ended up being referred to the complaints department. "Smaller companies without these legacy issues can be more responsive," he adds.
Lillywhite has experience of this from his days working for Royal & SunAlliance. "The biggest problem with the merger was integrating the different computer systems," he explains. "You would call the company and it would need to go through several different systems to locate a policy."
While advisers are in agreement about the problems mergers create for service, there is disagreement about product development. Webster says the edge can come off product development as a result of a merger. "Companies lose staff when they merge and you'll end up with fewer people working on product development. However, I would argue that we don't really need more product development. A life assurance policy is a life assurance policy; there's never much materially different, apart from the brochures."
Conversely, Lillywhite believes that consolidation among the large players will actually drive product development. He explains: "While the larger players compete for the cheapest rates, there will be plenty of room for niche players to go after the non-standard risks they're not interested in," he says.
He believes there is also room for more specialists in the market, and expects to see more as the bigger players get bigger and focus more on the general market.
And it is likely that the big players will get bigger too. Already there is plenty of speculation about which companies will be next, as Lillywhite adds: "There have been rumours about several of the large insurers including Norwich Union, Axa and Aegon, looking at acquisition targets and there are plenty of companies that may be looking for a buy-out. There's definitely going to be more activity in the market."
Certainly, while increases in the cost of borrowing may be making mergers more expensive, market conditions and challenges such as the Financial Services Authority's Retail Distribution Review add to the pressure to be big and beautiful. Clamp believes that more organisations are likely to pursue mergers or acquisitions to give them economies of scale. "It's the way the market's going," he adds. n
Sam Barrett is a freelance journalist
