AXA Moves to Strengthen Core Business After Sale of DLJ
At the end of August, AXA Financial (AXF), the unit of France’s AXA Group that controls its U.S. subsidiaries, agreed to sell its 71 percent stake in the investment bank Donaldson Lufkin and Jenrette (DLJ) to Credit Swiss First Boston (CSFB) for $2.4 billion in cash and $5.7 billion worth of stock.
AXA concurrently unveiled a proposal to acquire the remaining 39.7 percent of AXF from the minority shareholders for $10.4 billion in cash and stock, contingent on the success of the transaction with CSFB. The decisions, which most analysts approved, reflect the modifications taking place under new CEO Henri de Castries to refocus AXA’s overall strategy.
While AXA undeniably seized a favorable opportunity, there were sound strategic considerations behind the move. AXA’s buyout plan, which is being evaluated by a committee made up of independent directors of AXA Financial, offers minority shareholders $32.10 in cash and 0.271 AXA American Depositary Shares for each AXF common share.
The price, approximately $53.50 per share, is in line with the levels at which AXF has recently traded. The total outlay would be $4.2 billion worth of AXA ADR shares and $6.2 billion in cash.
AXA will have to come up with an additional $2.6 billion, but this doesn’t appear to be a problem. In affirming AXA’s rating and outlook, Standard & Poor’s stated: “Funding terms for the cash portion of the price are still being reviewed by AXA. However, this is unlikely to have a significant impact on AXA’s gearing and fixed-charge coverage, which are roughly 15 percent and eight times, respectively, and are consistent with the double-‘A’ rating category.”
The two transactions come less than four months after de Castries took over the reins at AXA from its legendary founder Claude Bébéar. French financial commentators were quick to praise the deal as showing that de Castries has the same intelligence and vision to seize opportunities as his predecessor.
DLJ faces increasing competition in its principal specialty, “junk” bond financing, from such firms as Goldman Sachs and Morgan Stanley. AXA is its biggest client in Europe, and, as de Castries has frequently said, AXA wants to devote its resources to the expansion of its core business. By severing its links with DLJ, AXA gains a freer hand to deal with other investment banks, particularly in the derivatives and securitization markets.
In another strategic move, made shortly before the DLJ/AXF deals, AXA unveiled a major restructuring of its global operations. In the planning stages since the beginning of the year, AXA Re, AXA Global Risks and AXA Cessions have been combined into one unit under the overall supervision of AXA Corporate Solutions.
“The newly integrated organization creates one operation and one profit center,” said Stephanie Binet, AXA vice president of corporate communications for AXA Global Solutions. “The goal is to have one account manager responsible for each major client.” Binet stressed that, although the new structure was designed to serve the need of large multinationals, it can also service any organization that operates on an international level.
“The new structure creates a matrix, which puts all operational units under one facility, so that any required expertise can be accessed within the group,” Binet said. With the increasing globalization of world trade, multinational companies need to assess risks and adjust coverages on an international, rather than a local, level. AXA Corporate Solutions aims to put together packages that can deal with the global aspects of risk analysis, securitizations, classic reinsurance and special programs.
“We believe we’re a global company,” Binet said, “and we want to prove we can take one account, see not only the risk manager, but also the brokers, the financial and the human resources people, and bring it all together to offer a whole package.” The
ability to call on experts from different backgrounds to assess the risks and design
relevant solutions is crucial to success, she indicated.
These initiatives illustrate the direction AXA is taking under de Castries, but what else may be planned is the subject of a lot of speculation. French financial commentators frequently write that AXA has designs on Generali, Europe’s third largest insurer. But most analysts discount the rumors as being “premature,” pointing out that the cost, at least $35 billion, would tax even AXA’s reserves, and that the regulatory (not to mention the political) approvals involved would be substantial.
The “natural venue” for AXA’s future expansion remains the U.S., where the general economic climate and the ongoing consolidation of the insurance industry seem to offer more tempting targets than Generali. Hartford Life, whose operating structure is similar to AXF, is often mentioned as a prime candidate.
It’s unlikely that there will be a big new initiative from AXA before the end of the year, as it works on implementing the restructuring, the DLJ sale, and the purchase of the AXF minority shares; however, should an “opportunity” arise, de Castries seems as ready as Bébéar was to take advantage of it.