M&A Trend Driven by Need to Enhance Scale

A spurt in merger and acquisition activity within the financial services industry has been catalyzed by a need to bulk up scale for growth opportunities and greater operational efficiency. Recent deals within the sector include, Bank of America's decision to buy FleetBoston Financial for $47 billion in stock.

Additionally, earlier this week, Newark, N.J.-based Prudential Financial agreed to purchase Cigna's retirement and investment services business for $2.1 billion dollars. And in a larger insurance deal, St. Paul, Minn.-based The St. Paul Companies will purchase its larger competitor, Travelers Property Casualty (Hartford, Conn.) for almost $17 billion in stock-to form the second largest commercial property & casualty insurer.

The newly formed company, which will be known as St. Paul Travelers Companies, will be based in St. Paul, Minn. According to Jay Fishman, chairman and chief executive, The St. Paul Companies (St. Paul, Minn.)-after its formation, the entity will leverage economies of scale for greater operational efficiency.

Increasing price pressures including higher reinsurance rates, low investment returns and massive unknown risks - like those associated with asbestos and mold - may have spurred the deal designed to help the companies establish a strong position for the uncertain future, relates Matt Josefowicz, manager, insurance group, Celent Communications (New York).

"Scale is one way to approach pressures like these," explains Josefowicz. The combined company will be more appropriately positioned to "command better reinsurance prices and pool their reserves." Additionally, both St. Paul Companies' Fishman and Travelers chairman Robert Lipp report that their companies conducted due diligence and were comfortable with the potential for exposure to additional asbestos claims going forward.

Although the technological assets of the companies may not have contributed to St. Paul Companies acquisition decision, St. Paul Travelers Companies' scale will help the combined entity to leverage operational efficiencies and thus lower its operational costs, contends Josefowicz. "Technology will play a role in them operating efficiently as a single unit," explains Josefowicz. As a result, "[The combined company] will be able to take more money out of its operations and contribute it to its reserve or spend it on other things."

But such an integration can't happen overnight. Celent's Josefowicz projects that a true technological integration will take years.