Judging M&A: how ratings can change post deal and why

One method of assessing the success or failure of a merger or acquisition in its aftermath can be through examining the impact—if any—on the surviving company’s ratings. But Dennis Sugrue, director of insurance ratings at S&P Global Ratings, stresses that ratings need to be viewed with a great deal of context.

Speaking to Intelligent Insurer on how the success—or failure—of such deals should be judged in a feature, called ‘A match made in … how re/insurance M&A should be judged’, Sugrue reveals the findings of a study carried out by S&P into how financial strength ratings tend to change after a deal.

The S&P study analysed the 50 largest transactions involving rated insurers since the year 2000. It showed that almost two-thirds (64 percent) of acquirers had their ratings affirmed following the announcement.

However, 22 percent of acquirers were put on a negative outlook or CreditWatch and more than half of these subsequently downgraded in the next five years.

This compares with 14 percent of acquirers that were placed on a positive outlook or CreditWatch, with all of them eventually upgraded.

Sugrue stresses that for all the talk around cost synergies and growth by the companies themselves, S&P tends to not to give credit for that within its rating analysis.

“It’s very often quite difficult to realise these things,” he says. “When a deal is announced management might say ‘here are the synergies that we would experience over the next two to three years’ but once the deal is closed, or maybe after the first couple quarters, these things tend to fall off the agenda for investors and for management teams.”

The full feature, which can be viewed by clicking here, also examines how share prices can be examined as a measurement of a deal’s success and includes an expert in change management who argues that a deal must have very clear objectives to be successful.