Aon zeroed in on NFP for its well-telegraphed entry to the middle market because it had a strong management team, an integrated model, and the structure to act as an effective distributor of Aon’s capabilities, group president Eric Andersen said.
Speaking in an exclusive interview alongside NFP CEO Doug Hammond, Andersen said: “[The middle-market brokers] are not all created equal. Some have done absolutely zero integration, and some have not made the investment in systems, culture and capability.”
He continued: “So there were some other platforms out there – and firms that would have been cheaper – but would not have actually helped us deliver on our growth aspirations in the way NFP will.”
Andersen and Hammond spoke to Insurance Insider US less than two months since the two firms announced that Aon had struck a deal to acquire NFP in a cash-and-stock deal for $13.4bn.
In further explaining Aon’s decision that NFP was the right partner, Andersen said that seeing the way Hammond and the leadership executed as a team, and the approach they took with clients meant “we felt really comfortable we can do great things together in the space”.
Insurance Insider US argued as far back as March last year that it was “the moment for dealmaking at Aon”, and that the most compelling move for the firm was the acquisition of “one of the more integrated PE-backed retail platforms”. It also revealed that Aon management thinking was evolving in the direction of this kind of deal.
Through the third and fourth quarter Aon ramped up work to examine the opportunity in the mid-market and engaged in exploratory discussions with upwards of half a dozen brokerages, according to sources. It is understood it engaged in more detailed discussions with Epic- and JenCap owner Galway and was in advanced takeover talks with AssuredPartners right up until the consummation of the NFP transaction.
In a wide-ranging interview, the executives also:
Explained how they expect to navigate the “best of both” worlds challenge in the deal – bringing NFP close enough to Aon to realize synergies and share capabilities, without pulling it so close that NFP management and production talent feel smothered
Revealed that NFP’s M&A pipeline has never been bigger, and argued that it has had the wherewithal and capabilities to carry out a multi-billion acquisition for five years now
Dismissed criticism that Aon overpaid for the asset by pointing to the earnings growth that would be seen in an extended path to closing and emphasizing that it walked away from lower-multiple opportunities
Discussed how hard it would be for levered brokers in the current environment, and why NFP took the decision to sell out to a strategic rather than re-fi with private equity
Chasing the “best of both”
In its piece immediately following the deal, Insurance Insider US argued that while acquiring NFP was the right strategic move, success would ultimately turn on Aon’s ability to have the deftness of hand required to create a “best of both” worlds outcome.
It would need to bring NFP close enough to realize cost synergies and provide the mid-market player with access to its product set and toolkit.
But it will have to do that without bringing it so close that NFP’s management team and production talent feel they have lost the operational and cultural autonomy needed to succeed.
Andersen said that Aon’s vision was for NFP – which will continue to operate under its own brand – to be “independent and connected”.
He continued: “The independent part of the discussion is the respect that we have for those relationships that the producers and client teams have built with their clients. You'd never want to disrupt that.”
Pressed on whether there was a legitimate fear Aon could kill the goose that lays the golden egg by imposing large company central controls and frameworks, Andersen acknowledged: “I think we are very aware of that risk, and we have to make sure that the ‘independent’ is respected, and that the ‘connected’ is where we can actually drive benefit to the colleagues and clients of NFP and Aon.”
He concluded: “But listen, you called it a risk to our execution and it is one we are very attuned to. And as we begin to set up the interactions with the firms that is front of mind. We want to make sure that we are only interacting in areas where we're adding real value, not just areas where we are enthusiastic and interested.”
Hammond said that an important part of the decision to go with Aon was its commitment to NFP’s autonomy. “The willingness to allow us to maintain our independence and our structural integrity was critically important to us,” he said.
He further argued that NFP was well set up to deploy Aon’s capabilities and products. Hammond noted that NFP was set up on a regional governance model, with some national practices that effectively wholesaled capabilities to the regions.
This “chassis” should position NFP well to connect into Aon, he said. Staff, meanwhile, are excited about the deal – with brokers in the field “just hungry for more capabilities” that the deal will open up for them.
During both of the major attempts at recent consolidation in the broking segment – Marsh McLennan-JLT and the abortive Aon-Willis deal – the parties came under sustained attack from rivals looking to exploit dislocation to lift-out talent.
NFP as an M&A engine
Aon has acquired NFP in part because it has an M&A engine that will allow it to pursue a consolidation strategy across both in its human capital and risk capital segments in the fragmented mid-market.
NFP acquired more than 200 businesses between 2018 and 2022, with Hammond disclosing that the firm has recently acquired $40mn-$55mn of Ebitda per year, including $40mn in 2023.
Hammond said that despite some disruption just ahead of the Aon deal that squeezed 2023’s acquired Ebitda, NFP’s pipeline “has never been bigger, and the deals that are coming in are actually more attractive now than they have been”.
He forecast a “fantastic year from an M&A perspective” for NFP. “We see that continuing, and we know that we’ll have Aon support on the M&A front.”
Asked if NFP had the operational wherewithal to integrate a multi-billion platform deal given some speculation there could be large platform consolidation, Hammond said: “I have felt confident that NFP was capable of doing that for the past five years.”
He said that there was a lot of “wood to chop” on the transaction and bringing the two organizations together, but said that over time there could be “interesting” opportunities with larger scale assets that might create value.
Questioned about how Aon would allocate its cashflow between the share buybacks that have been popular with investors, and M&A opportunities including via NFP, Andersen pushed back.
“I think people tend to criticize us for being over-reliant on buybacks,” he argued. “But the reality is we have been a significant acquirer of capability over the last 10 years – whether it was with cyber, or Tyche in the UK around reinsurance.”
He continued: “We always have taken a position that we want to keep investing in the business which we will continue to do.”
But he also argued that the firm’s free cashflow model showed that the shares were highly undervalued, which meant that it was also highly attractive to deploy capital here.
“I would expect that both of those will find balance and we'll continue to do both going forward.”
Multiple gymnastics
There has been some criticism from investors around the multiple being paid for NFP, with this publication saying that the valuation was what you may expect in a highly competitive situation. In this instance, Aon was the one standout potential bidder – with Marsh McLennan understood to have had no involvement.
Aon announced the deal at a 15x multiple. But this reflected a modelled full-year 2025 adjusted Ebitda figure of $895mn to reflect scope for an extremely extended path to closing due to the stringent US antitrust environment.
However, sources place current adjusted Ebitda at $700mn-$750mn, which is closer to 18x-19x, while last-twelve-months Ebitda at 30 September last year was $583mn, as per Moody’s numbers.
Andersen said that the “multiple will be what it is” and described attempts from market-watchers to put a “real” multiple on the deal as “gymnastics”. “It will be clear when we get past the regulatory process and when we get to a close,” with the price fixed and the Ebitda growing month-over-month.
He also stressed that there were other assets available at lower prices – with a “lot of versions [of the model] available” – but stressed NFP had been the deal they wanted.
Pressed on the decision to move now rather than to allow competitive pressure to build for the levered brokers over the next 6-12 months, potentially allowing Aon to get in at a valuation that was a turn or two lower, he said: “I think getting in with the right player with the right team with the right culture is what's going to drive success here, and not waiting six months or going six months earlier.”
Earlier this morning, Aon announced that the waiting period during which the DOJ could begin a full investigation into the antitrust implications of the NFP deal had passed without it making that move. This effectively clears the path for the deal to avoid an antitrust challenge in the US.
NFP’s take on The Squeeze
Insurance Insider US has been chronicling the more challenging operating environment for the levered brokers for around a year, with these players facing what we have dubbed The Squeeze owing to the higher cost of debt, a less exuberant private equity environment, and the likelihood of lower growth to come.
Asked on the prospects that peer companies faced, Hammond said: “I think it's a very tough landscape right now. I don't think interest rates are going to back down to zero.”
He said that in this new operating environment with the increased cost of capital as a priority, management is forced to “focus daily on grinding down the expense line” and stop investing in the business to create new resources.
“I felt like in this environment Aon was the right partner for us to continue to invest for growth in our business,” he said.
Hammond also pointed to some of the challenges faced by mid-sized brokers as they scale. He said that NFP needed to continue to enhance its data and analytics, and technology capabilities. He pointed to the need for a broader international presence and said that the firm was hitting “roadblocks” as its customers' needs become more complex.
“All of these are areas where Aon excels from a resource perspective,” Hammond said, adding that the two businesses are complementary as they operate in completely different market segments.
As the emphasis shifts from deal origination and merger arbitrage now zero interest rates have disappeared, the need for PE-backed brokers to be integrated enterprises that are more than the sum of their parts is increasingly coming into focus as a theme.
* A previous version of this article stated that: 'Aon was set up on a regional governance model'. This has been amended to: 'NFP was set up on a regional governance model'.