Merger and acquisition (M&A) activity for title agents has increased due to macroeconomic tailwinds and increased compliance costs. This month alone, we’ve seen Fidelity National announced that it will acquire Stewart Title – and this certainly won’t be the last title M&A of the year.

To discuss how we got here and what to expect next in title M&A – as well what buyers and sellers should do in this market, we invited Juan Guzman and Sam Kramer of Houlihan Lokey to speak at our Opportunity webinar series.

With a combined 40 years of experience in insurance and banking M&A, Juan and Sam are the goto source in title M&A. Their firm, Houlihan Lokey, is a leader in mortgage and insurance investment banking to the middle market. They recently advised Title Guaranty of Hawaii on their majority sale to Fidelity and Nationstar Mortgage on their sale to WMIH.

So what did they have to say?

Things have been good for a long time

Since the Great Recession starting in 2008, refis have kept many in the mortgage industry afloat, due to the historically low interest rates we’ve seen. Once the economy started improving, purchasing picked up as well. Lenders are extending more credit to homebuyers, but two upward hikes in mortgage rates recently have dampened the refinance market to its lowest percentage since 2008. Housing prices have been made a big comeback, mainly due to low inventory.

Well, what about title?

“A rising tide raises all boats,” so title has benefited from the growth in the real estate industry. The recent fall in refinance was more than offset by purchase activities, so things have been healthy in title overall for about a decade.

But things aren’t rosy

Even with a healthy market, things are not perfect. Increased compliance has lead to decreased margins and increased turn times. These higher compliance costs, combined with falling profits, have made scale more important. Technological changes such as blockchain have moderately alleviated some of these problems – but it has been a slow process and it’s been difficult for smaller or more established firms to keep up. The difficulties in the market, as well as the recent tax cuts, have created a market prime for M&A.

Valuation

The prolonged low interest rate environment, abundant deployable investment capital, and continued positive economic outlook have had a positive effect for sellers. EBITDA multipliers can range from low single digits for smaller operators to low double digits for tech-enabled, larger platforms. Houlihan Lokey puts valuations into 3 camps:

• Platform acquisition
• Geographic acquisition
• Smaller/Regional acquisition

Platform acquisitions are typically 6-10X EBITDA. Buyers seeking platform to grow in the title industry have characteristics of strong roll-up platforms. An example of this is the Stewart/Fidelity deal. While Fidelity paid a pretty penny for their acquisition of Stewart, there were other financial forces at work there as well. Fidelity expects $135 million in annual operational cost synergies.

Geographic acquisitions are also typically 6-10X EBITDA and, as the name suggests, allows for a player to break into a previously fresh territory. An example of this is when Houlihan Lokey assisted in the Fidelity merger with Title Guaranty of Hawaii last year.

Smaller and regional acquisitions are in areas where the companies may only be a few counties large. Because of this, the financials are typically <5x EBITDA. There is a limited market of acquirers outside of local competitors and they typically lack significant earnings scale.

Transition Planning

First, you need to figure out what type of transition you are planning. Debt finance, minority stake, majority stake or full-on buyout all have different reasonings and variables to look into. Are you looking to buyout minority partners? Get some short term capital to invest into the business? Maybe you want to get out of the business entirely, but keep your loyal employees on for the future? Working with M&A experts can help you analyze what’s right for you.

And on the buyer’s side of things: there are two types: financial and strategic. Both have upsides and downsides when executing a purchase.

On the upside, financial buyers can maintain some level of equity in the business and keep management continuity. On the downside, there’s the chance of comparatively lower valuations due to the higher cost of capital, when compared with the strategic buyer. There’s a likeliness of a resale in five or fewer years, and will likely require the company to manage the debt burden after the transaction.

Strategic buyers benefit from synergies which can be a significant value-driver and result in business with greater scale. But while management can remain in place, it can have less
control over the strategic direction of the business and there is some integration execution risk.

If you’d like to see the presentation live, click here or here.