The art of the deal Featured

8:00pm EDT September 25, 2009

F. Robert Woudstra has been bought and sold so he knows what it feels like.

Nearly a decade ago, he was an executive about to be acquired by insurance powerhouse Farmers Group Inc.

Sitting across the table from Farmers, he had his own concerns about how being acquired would affect his career and his people, but he was quickly impressed with the empathy, thoroughness and welcoming nature of Farmers. In fact, he was impressed enough to stick around and eventually become the company’s CEO.

So as Farmers began the process to acquire 100 percent of American International Group Inc.’s U.S. Personal Auto Group, which includes 21st Century Insurance, the first dance was one Woudstra took slowly.

“When I first sat down with them, I said, ‘Well, the first thing I can tell you is in the year 2000 I was you, because I was part of an organization that was acquired by Farmers,’” he says.

Farmers announced the completion of the deal on July 1, 2009, at a purchase price amounting to approximately $1.9 billion. It’s the company’s fourth acquisition over the last nine years and certainly the largest in its history. But while 21st Century employees were pleased to take their successful unit away from the troubled AIG name, the whole process wasn’t easy and it wasn’t quick. Woudstra and his senior leadership team did a lot of work behind the scenes making sure the two pieces would come together into a stronger whole, and that meant legwork from the business end as well as from the standpoint of both groups of people. Once Woudstra did that, Farmers was able to roll out the acquisition in a way that was welcoming to 21st Century and thoroughly explained to both groups.

Find the right fit

OK, it’s not news, but it’s worth mentioning that an acquisition in excess of $1 billion doesn’t happen overnight. The reason it’s worth mentioning is that, really, it took roughly three years for Farmers to get from thinking heavily about such a move to bringing in 21st Century. Woudstra was in on the process from the very beginning, as he was president and chief operating officer before stepping into the CEO role in January 2009, and for him, there are a lot of components to the process. When you want to acquire, you have to look for a few things: fit, timing, price and a unique opportunity.

The first question you have to ask is what makes a potential acquisition unique. Farmers did customer research and knew there weren’t a lot of fits like 21st Century out there, as it would allow the company to maximize its customer marketing and reach all methods of automobile insurance distribution.

“You will find that there are not many other players that play what I would think of as all different ways of accessing customers, which we believe then puts us in a much stronger position in the upcoming years,” he says.

If you narrow your frame, the first thing you’ll realize is that a good percentage of what’s on the marketplace will come off your radar.

“Certainly if you’re an existing company and you say I’d like to acquire somebody who currently does automobile insurance through what we call the direct channel, there are not very many,” Woudstra says. “So deciding that you want to acquire somebody, again, there’s not a plethora of those companies out there to acquire, and we knew that.”

But once you’ve narrowed your search field a bit, you still can’t go overboard for something that looks right. Setting a price in your mind is an important part of the process. Farmers had its eye on 21st Century for a while, but as AIG’s troubles continued, the price became right.

“When the 21st-AIG opportunity came along because of obviously all of the issues we know AIG has been in — not this business per se but the corporation — we then got very excited about having this opportunity,” he says.

And when you have a unique asset available in your price range, the slow deliberation of the rest of the process has to be put away, as you need to attack.

“This kind of an asset, there’s not many of these that exist, and the ability to buy one in our past and in the future is not very high, so when this opportunity came about, and certainly with the price at which we were able to acquire it, there’s no question that this is a growth opportunity for the organization, for our shareholders,” Woudstra says.

So while this may take time, you can’t sit around when a company that feels like a match is at your price point. If you do, it won’t be around later.

“There’s no question strategically that this is an asset that we need to have, and if we wanted to wait until later, this could be unavailable,” he says.

Verify a cultural match

Once you’ve matched business needs, you need to figure out the most critical match: the people. At Farmers, Woudstra has been through the process to know how important that is.

“We needed to look at the people fit,” Woudstra says. “So this will be the seventh transaction in my career. I’ve been involved in selling companies and I’ve been involved in acquiring companies, and when you’re acquiring companies, it is a culture fit with the people.”

But, like evaluating the business deal, that takes time. You start it at the outset, when you begin negotiating with senior leaders, but you verify at each step, fleshing out how many people you speak with and, like any good marriage, by talking about your future together.

“We both had the opportunity to watch each other in action, so to speak, and we continued to talk about the future opportunities of coming together and it’s just through a lot of that contact over the last six months that has allowed us to get comfortable with them because we’re making the buying decision,” he says. “Certainly being comfortable with them and having the sense that they were extremely comfortable with us.”

You don’t sniff that out alone. Up to 20 leaders from Farmers came through and met with their counterparts within 21st Century.

“So it’s not just a matter of myself and one or two other people, there’s been a significant number of people involved in this process,” Woudstra says.

But even with that help, you still have to be there to be the face of the acquisition on both ends. When the deal was announced, Woudstra met with 21st Century leaders to field any questions about their future involvement.

“I traveled to Wilmington, Del. (21st Century’s headquarters), and spent one whole day there on site with the top 20 people within that business group and had the opportunities to listen to them talk about the things that they’re working on and explaining the strategy as to how we saw them fitting into our business plan,” he says. “I sat there for about three hours and let them ask every kind of question they wanted to ask me.”

During that process, time set aside for listening was first and foremost on his to-do list to ensure their comfort in the deal.

“First, I listened to them, things they’re working on in their business unit,” Woudstra says. “It’s like anything when you first start becoming a group — you don’t want to tell someone something; you want to listen. So the first few hours was me getting

an opportunity to listen to what they’re doing today within their business and having them have an opportunity to present it themselves on an individual basis, the top 20 people, and then, from there, it was a matter of talking to them about strategically how we saw this group of people in this part of the business adding value into the business.”

Roll out the transition

Once you put things into final motion, you have to plan for everything that happens right before, during and after the actual merger. That may mean a lot of financial work and press releases, but it also means keeping in mind the number of people involved on all ends.

“When you acquire something, there are a lot of different audiences,” Woudstra says.

Write down all of them and consider how the message should be portrayed to them. For Farmers’ acquisition, there were shareholders, employees, employees of 21st Century, customers of both companies, distribution groups like independent agents and so on.

“The way you meet up in the best place is when you understand who all your audiences are and you go about specifically talking to them, and not just in some general sense but more specific to that audience,” Woudstra says.

Farmers did that internally even before the transaction happened, explaining to the people who would be involved with the nitty-gritty details of the deal why the potential asset was important.

“That group we sat down and spent time describing what were the strategic reasons we would have an interest in evaluating this company so that group could completely understand our thinking strategically,” Woudstra says.

While rules and regulations will determine how hamstrung you are in telling details, as soon as you can say something, do. When the first announcement of the acquisition was made on April 16, Woudstra got on the phone with the top 250 people at Farmers to explain details.

Farmers also had a plan ready to go to get in front of other audiences immediately.

“Within two and a half days after we announced the transaction, we were in front of more than 12,000 of our 15,000 agents, face to face with a senior executive explaining exactly what this transaction was all about,” Woudstra says.

A plan like that intentionally includes senior people, and more to the point, it intentionally includes people who were close to the deal.

“It wasn’t just an employee; it was a very senior person and a very senior person who was involved in the due diligence of the asset and had the complete understanding of the 21st Century group and could articulate very strongly how we saw it fitting into our business plan and believed in it,” he says.

He also did what he could to address 21st Century in mass before he could do more personalized things, so he put together a video to address them.

“They’re in different locations and there are about 5,500 of them, so I had an opportunity to put a video together so they could at least see me and I had the opportunity to address them,” he says.

You have to continue that communication through all of the stages. Like the different audiences, you have to realize the stages of the acquisition — from the first hint of a deal to the day the two companies merge. At Farmers, the company put a message up on its internal site in July to welcome the new people when the final transition took place, and Woudstra and four other senior executives went to Wilmington to do town-hall meetings with 21st Century’s top executive Tony DeSantis and his senior team.

Prior to that, all of 21st Century’s people received a welcome bag with items like a personalized letter from Woudstra, a Farmers informational DVD and brochures giving an overview of company benefits information. It’s something Woudstra remembers making the transition easier in 2000.

“Again it’s welcoming and making them feel what they were becoming a part of, and even as we explained this to the 21st Century people, they were quite impressed to the lengths we were going to reach out to every employee to let them know that every employee was important,” Woudstra says.

How to reach: Farmers Group Inc., (800) 327-6377 or www.farmers.com