2017 Best Practices Study

The second factor contributing to the elevated M&A activity in the industry is the unusually strong public broker valuations over the last several years. Stock prices for most of the publicly-traded brokers (AJG, AON, BRO, MMC & WLTW) reached all-time highs during Q1 2017. As a group, the public brokers traded at 12.6x EBITDA ( Earnings Before Interest, Taxes, Depreciation and Amortization) on March 31, 2017, extremely high by the historical standard of 9.0x - 11.0x EBITDA.

12.6x

12.4x

12.1x

11.8x

11.1x

9.9x

9.7x

2011

2012

2013

2014

2015

2016

Q1 2017

Source: Public Broker SEC Filings

In fact, the only other time in the past 20 years that public broker valuations reached EBITDA multiples of 12.6x or higher was during the sharp hard market driven by the terrorist acts of 9/11, when organic growth rates spiked upward. Public broker valuations have not reached today’s levels during any stretch of “normal” market conditions. Public broker valuations influence valuations across the entire industry, but their influence is the strongest on PE-backed brokers. PE-backed brokers typically determine their own values by applying a slight discount (10%-15%) to public broker multiples. There are several PE-backed brokers today that value their own stock at north of 11.0x EBITDA. These lofty valuations allow buyers to be more aggressive, which drives valuation and activity upward. When buyers are trading at 11.0x or 12.0x EBITDA, they can raise the price they pay for acquisitions, keeping a comfortable spread between their own multiple and the multiple they use to acquire smaller firms. Of course, it is not just the activity that has accelerated in recent years – valuations have also benefited. As the following graph demonstrates, the entrance of private equity capital and the sky-high public broker valuations have significantly increased values being paid for private brokers.