What’s the business model?

Insure insurance companies

What are the revenue streams?

Number of clients * premiums (%) * price of original contracts

Why this acquisition?

Ensure revenues, growth, presence in Asia, the complementarity of firms

The interviewee should understand the market and ask questions to get a good grasp of the client problem. Possible questions:

What’s the business model?

What are the revenue streams?

Why this acquisition?

Company (Performance, Complementarity of Products, Complementarity of Market Penetration Globally), Market (Growth, Competitors, Market Shares), Financials (Financing of Acquisition, Occurring Costs)

The interviewee should come up with a structured answer covering the main issues at stake. The idea is to give an overview of the companies and the interest of the transaction between them. It also tests the abilities of the interviewee to create excitement and interest for the topic at hand to a third person.

A possible answer would be:

1. Company

• Performance? Both companies are performing well on their respective markets
• Complementarity of products? Very good
• Complementarity of market penetration globally? Our client is present in Europe and USA. The acquired company is present in Europe and Asia

​2. Market

• Growth? Flourishing market
• Competitors? The transaction should give REA a better competitive position in the market
• Market Shares? New clients in Asia

3. Financing

• Financing of acquisition? Cash reserves + debt
• Occurring costs? The acquisition price, transactional costs

The interviewee should come up with a structured answer, which shows a good understanding of the context.

Possible answer:

Benefits revenue side:

• Increase in revenues (Sales REA + Sales acquired company + Cross-selling)
• Volume effect (offers better diversification of risks)
• Higher market share (allows for better prices/margins through leadership position in the market)

Benefits cost side:

• Economies of scale (imagine for example product design and research)
• Overhead costs synergies (through elimination of redundancies)

The first step should be the identification of the companies’ costs, relevant to the reinsurance industry.

Possible answer:

• Staff costs
• Real estate
• Marketing & distribution
• IT costs
• Travel and entertainment
• Administration and logistics

The interviewee should start the calculations with the help of Table 1 and 2.

You can ask the interviewee for a reasonable percentage of costs that can be saved through synergies. 30% would be a good estimation.

Further remarks: Marketing and Administration are included in the HQ costs, while staff, real estate, IT and travel costs only arise in the regional sites at the beforementioned percentages.

Eligible for synergies: Yes!

Eligible for synergies: Rather not.

Eligible for synergies: Arguable, assume - due to little regional overlap - not.

Eligible for synergies: Yes!

Eligible for synergies: rather not.

Conclusion

The transaction does indeed allow cost savings due to synergies. Since there is no information given on the acquisition price, at this point no evaluation can be made regarding the potentially high acquisition costs.

Total costs to be saved due to synergies: $350,000 + $ 200,000 = $550,000