Tag Archives: acquisition

Spending on Agents Beats Spending on Ads

A recent research report published by Cliff Gallant and Matthew Rohrmann of Nomura Equity Research concludes that spending on advertising beats spending on insurance agents.  Once again, Wall Street gets it wrong.

Their logic is flawed. The authors choose to focus only on advertising spending in 2013 and limit their analysis to the top-10 auto insurers. They then compare the advertising spending to premium growth that year. Because GEICO spent the most on advertising and had the largest premium growth, the authors conclude that advertising beats spending on agents.

But one year of advertising spending does not account for GEICO’s 2013 premium growth. The company has spent decades building its brand awareness. Since the mid-1990s, GEICO has spent billions of dollars to become top of mind as the company to consider if you want to purchase cheap auto insurance (a.k.a., “1-800-cheap insurance”). If GEICO stopped advertising, its growth would stop because it has almost no other way to reach the consumer (“almost” because even the king of direct-response insurance has 150 insurance-agent locations.)

Instead, other important factors account for GEICO’s performance in 2013: namely, its strategy to grow premium even if unprofitably. GEICO can afford to grow unprofitably because its owner, Berkshire Hathaway, is more interested in generating funds to invest than in consistent profits. In 2011, for example, GEICO saw its profits plunge 48% while its advertising costs increased 9.4%.

A better way to evaluate whether to advertise or invest in agents is to look at the costs of acquiring and retaining customers.

While GEICO scores high in initial consideration, it lands in the middle of the pack when it comes to the actual insurance purchase, according to the McKinsey 2012 Auto Insurance Customer Insights Report. It costs GEICO relatively little to get a consumer to make an inquiry, but a lot more to have someone buy a policy. And agent-oriented insurers score much higher in retention than GEICO and other direct-to-consumer auto insurance companies do, according to the McKinsey report.

The high retention numbers for agent-based insurance companies demonstrate that companies that underinvest in their agents do so at their own peril. Local agents build long-term relationships with consumers. Advertising doesn’t.

With the advent of the Digital Age, companies can generate bigger returns on their investment in agents. This goes against conventional wisdom. However, cloud computing, digital marketing, and social media let agents compete against the industry’s “brand behemoths” in their local community. Forward-thinking insurance companies are designing programs for their agents to leverage these new capabilities. These companies are finding they get a much bigger return on investment than with traditional advertising spending.

Consumers want choice today, and they expect to do business with companies that can provide a multi-channel experience. A local agent whom a consumer can visit, call or access via a website provides the experience that today’s consumer demands.

Insurers that focus on investing in their agent distribution channel will win. Pressure on companies to increase their advertising led to the insurance advertising wars of the last decade, and many companies diverted dollars from their agents to pay for increasing their advertising. But that trend appears to be changing as companies realize the power of agent-based distribution in today’s auto insurance market. For example, Allstate recently announced a renewed commitment to grow its agency distribution channel after years of neglect.

A strong agent-based distribution channel creates a long-lasting and compelling strategic advantage. Blindly ramping up the ad budget is a simplistic, ineffective solution. Spending on ads just creates an indistinguishable commodity product where price and a cute mascot are the only differentiators.

$1.25M Backpay Highlights Risks of Mismanaging Union Risks In Merger & Acquisition Deals

September’s National Labor Relations Board (NLRB) order requiring the buyer of a California nursing home to pay approximately $1.25 million in backpay and interest, rehire 50 employees and recognize the seller’s union reminds buyers of union-organized businesses of some of the significant risks of mishandling union-related obligations in merger and acquisition, bankruptcy and other corporate transactions under the National Labor Relations Act (NLRA) and other federal labor laws.

Buyer’s Obligations To Honor Seller’s Collective Bargaining Obligations
Under the National Labor Relations Act, new owners of a union facility that are “successors” of the seller generally must recognize and bargain with the existing union if “the bargaining unit remains unchanged and a majority of employees hired by the new employer were represented by a recently certified bargaining agent.” See National Labor Relations Board v. Burns Sec. Servs., 406 U.S. 272, 281 (1972).

In assembling its workforce, a successor employer also generally “may not refuse to hire the predecessor’s employees solely because they were represented by a union or to avoid having to recognize a union.” U.S. Marine Corp., 293 National Labor Relations Board 669, 670 (1989), enfd., 944 F.2d 1305 (7th Cir. 1991).

Nasaky, Inc. National Labor Relations Board Order
September’s National Labor Relations Board Order requires Nasaky, Inc., the buyer of the Yuba Skilled Nursing Center in Yuba City, California, to recognize and honor collective bargaining obligations that the seller Nazareth Enterprises owed before the sale and rehire and pay backpay and interest to make whole 50 of the seller’s former employees who the National Labor Relations Board determined Nasaky, Inc. wrongfully refused to hire when it took over the facility from the prior owner, Nazareth Enterprises.

Before Nasaky, Inc. bought the nursing home, many of the employees at the nursing home were represented by the Service Employees International Union, United Healthcare Workers West (Union). After Nasaky, Inc. agreed to buy the facility but before it took control of its operations, Nasaky, Inc. advertised in the media for new workers to staff the facility and told existing employees at the facility that they must reapply to have a chance of keeping their jobs under the new ownership.

When Nasaky, Inc. took operating control of the facility, facility operations continued as before with the same patients receiving the same services. The main difference was the workforce. The new staff included 90 employees in erstwhile bargaining unit positions, of which forty were former employees of the predecessor employer and fifty were newcomers. Nasaky, Inc. then took the position that the change in the workforce excused it from responsibility for recognizing or bargaining with the union or honoring the collective bargaining agreement between the union and seller Nazareth Enterprises.

When the union demanded that Nasaky, Inc. recognize the union and honor the union’s collective bargaining agreement with Nazareth Enterprises, Nasaky, Inc. refused. Instead, Nasaky, Inc. notified the union that it would not allow the union on its premises, would not honor the union’s collective bargaining agreement with the seller, and did not accept any of the predecessor’s terms and conditions of employment. The union then filed charges with the National Labor Relations Board, charging that Nazareth Enterprises had breached its obligations as a successor under the National Labor Relations Act.

After National Labor Relations Board Regional Director Joseph F. Frankl agreed and issued a complaint, California Administrative Law Judge Gerald Etchingham found all the allegations true based on a two-day hearing. He rejected all of Nasaky’s explanations for why it declined to hire most of those who had worked for the previous employer. See the Administrative Law Judge Decision. Since Nasaky, Inc did not file exceptions, the National Labor Relations Board ordered Nasaky, Inc. immediately to recognize and bargain with the union, hire the former employees and make them whole. The amount of backpay and interest is expected to approximate $1.25 million.

Managing Labor Exposures In Business Transactions
The National Labor Relations Board’s order against Nasaky, Inc. highlights some of the business and operational risks that buyers and sellers can face if labor-management relations are misperceived or mismanaged in connection with business transactions. Because the existence of collective bargaining agreements or other labor obligations can substantially affect the operational flexibility of a buyer, buyers need to investigate and carefully evaluate the potential existence and nature of their obligations as part of their due diligence strategy before the transaction. A well-considered understanding of whether the structure of the transaction is likely to result in the buyer being considered a successor for purposes of union organizing and collective bargaining obligations also is very important so that the buyer and seller can properly appreciate and deal with any resulting responsibilities.

Beyond the potential duty to recognize a seller’s collective bargaining obligations, buyers and sellers also should consider the potential consequences of the proposed transaction on severance, pension, health, layoff and recall and other rights and obligations that may arise. At minimum, the existence of these responsibilities and their attendant costs are likely to impact the course of the negotiations.

When a worksite is union-organized, for instance, additional obligations may arise in the handling of reductions in force or other transactions as a result of the union presence. For example, in addition to otherwise applicable responsibilities applicable to non-union affected transaction, the Worker Adjustment Retraining Act (WARN) and other plant-closing laws and/or collective bargaining agreements may impose special notification or other requirements before a reduction in force or other transaction related activities.

Similarly, the existence of collective bargaining agreements also may trigger obligations for one or both parties to engage in collective bargaining over contemplated changes in terms and conditions of employment, to provide severance, to accelerate or fund severance, benefits or other obligations, to provide continued health or other coverage, to honor seniority, recall or other rights or deal with a host of other special contractual obligations.

Where the collective bargaining arrangements of the seller currently or in the past have included obligations to contribute to a multiemployer, collectively-bargained pension or welfare plan, the buyer and seller also need to consider both the potential for withdrawal liability or other obligations and any opportunities to minimize these exposures in structuring the allocation of the arrangement. In this case, both parties need to recognize that differences exist between the federals for determining when successor liability results under the withdrawal liability rules than typically apply to other labor and employment law purposes.

While buyers and sellers often presume that the stock versus assets sale distinction that typically applies for many other legal purposes will apply, this can be an expensive mistake in the case of determining a buyer’s obligation to honor the seller’s collective bargaining obligations post deal. Likewise, buyers can be exposed to multiemployer successor liability from asset transactions, although it may be possible to mitigate or avoid such liabilities by incorporating appropriate representations in the sale documents or through other steps. Since these multiemployer withdrawal and contribution liabilities generally attach on a controlled group basis, both parties need to properly appreciate and address these concerns early in the transaction to mitigate their risks and properly value the transaction.

In light of these and other potential labor-related risks that may affect corporate and other business transactions, parties contemplating or participating in these transactions are urged to engage and consult with competent legal counsel with specific experience in such labor-management relations and multiemployer benefit plan matters early in the process.