AIG Outbids Prudential for American General

No one has ever accused American International Group (AIG) CEO, Maurice “Hank” Greenberg, of thinking small or being timid. He reinforced his reputation April 3 with a letter to American General CEO Robert Devlin that began “Dear Bob,” and went on to outline a $23-billion counteroffer to acquire Am Gen out from under its previously announced merger partner, Britain’s Prudential PLC (see IJ, March 19).

Prudential plc had filed an injunction against AIG to halt talks, but announced April 18 that it had dropped that injunction. It will, however, pursue its lawsuit and will continue to seek monetary damages.

The injunction request, filed last week in a Texas court, was based on allegations that AIG had failed to file the required documents with the Securities and Exchange Commission concerning its proposal to acquire Am Gen. AIG filed them last Thursday, and Pru therefore dropped its request for an injunction. A hearing on the matter was canceled.

While both Pru and Am Gen affirm that their merger agreement remains in force, it appears that AIG’s bid is superior, and that it will eventually be accepted by Am Gen’s board and its shareholders.

Commenting on AIG’s offer, Greenberg stated: “[We] believe that the combination of our two companies is uniquely attractive, in terms of mix of businesses and distribution channels, and would be highly beneficial financially to both our shareholder groups.”

Citing the experience of subsidiaries Sun American, acquired in 1998, and Hartford Steam Boiler, acquired last year, he stressed AIG’s “decentralized approach,” which would leave Am Gen with a great deal of independence and minimize job losses.

Joe Norton, spokesperson for AIG, confirmed that the company has “signed a confidentiality agreement with American General Corporation (AGC) and that the parties will commence discussions immediately regarding AIG’s April 3, 2001, offer to acquire American General.”

In a telephone press conference the following day, Greenberg elaborated on the synergies that could be achieved. He cited potential areas for growth in life insurance, consumer credit and retirement savings in conjunction with Sun America, and estimated that the acquisition of American General would add 10 to 12 percent to AIG’s top line, in exchange for about an equal percentage of equity.

Greenberg anticipated cost reductions as well. “I believe expense savings possibly, or very likely, will exceed the numbers that were produced by Prudential,” he said. “We estimate, at least conservatively, that $2 hundred million could be taken out, and so we’re quite comfortable with both the potential for growth and the potential for expense savings.”

Greenberg saw few difficulties and definite advantages in the merger.

“I think the integration issues are minimal,” said Greenberg, “American General has a good brand name, and…to retain that is important, obviously, as we do with other companies in our group, but there will be a lot of strategic opportunities to flow from this combination.”

AIG’s offer values Am Gen’s shares at $46. “This price will remain constant as long as AIG shares trade within a 5 percent collar during an agreed upon period prior to the closing date,” wrote Greenberg.

Shares were trading at around $80 when the offer was announced, establishing the price spread at between 0.5462 and 0.6037. They have since dropped to between $75-$76. In response to several questions, Greenberg made it clear that neither the price nor the 5 percent collar were negotiable. “It’s a tight collar” and “there’s no flexibility in the price,” were his terse responses.

The collar’s role is important, as Greenberg confirmed that it was the sharp fall in value of Prudential shares that precipitated AIG’s counteroffer. In his letter, he stated: “As I explained when we spoke today, we have been observing closely the market’s reaction to the announcement of your intent to merge American General with Prudential PLC. It appears clear that the exceptionally steep price drop experienced by Prudential’s stock reflects investors’ serious concerns with the transaction.”

Analysts had questioned the terms of Prudential’s offer from the outset, and most now predict that AIG will succeed. While Prudential’s bid was originally estimated at $26.5 billion, the drop in the share price reduced it to around $20 billion. Prudential’s shares actually rose after AIG’s offer on speculation that it would lose, just as AIG’s dropped—a seesaw effect occurring frequently in corporate bidding wars. AIG’s share value, however, has a significant premium over most insurance company stocks and can be expected to hold up well even in today’s market.

While Prudential’s management continued to insist that the “merger agreement with American General remains in full force and effect,” it declined to increase its bid by offering additional cash. It can’t entirely abandon the proposal, however, without jeopardizing the payment of a $600 million breakup fee, even if it appears unlikely to succeed.

Greenberg did acknowledge Prudential’s interest. “Our clear determination is to reach a three-way resolution in a professional and constructive manner that will benefit all shareholder groups involved,” he wrote. At the press conference he added that, the breakup fee “is in the deal, but its payment is Am Gen’s responsibility.”

Am Gen management reacted cautiously. It stated only that it had received “an unsolicited, competing offer from American International Group,” which would “be carefully considered by the company’s board of directors,” and that any decisions would “be in the best interest of its shareholders.”

The board met on April 9, at which time it voted to authorize its management and its advisors, Morgan Stanley, to meet with AIG and further explore the terms of the counteroffer. It decided that AIG’s bid could be considered a “superior proposal” as defined in its agreement with Prudential, and thus imposed a fiduciary duty on management to consider it.

While Am Gen reiterated that “its merger agreement with Prudential plc remains in full force and affect,” its decision to open talks with AIG in fact moves it one step closer to accepting the counteroffer and rejecting Prudential’s. Greenberg’s proposal is conditioned on a “due diligence” review of Am Gen’s finances, and this could proceed as part of their discussions.

Greenberg’s target selection and timing were flawless. With total assets of $120 billion, offices in 40 states and 16,000 employees, Am Gen, a well-managed and profitable company, is a leader in annuities, life insurance and real estate, and consumer financing—exactly the areas Greenberg singled out for potential growth.

AIG wants to expand its U.S. life and annuity operations to capitalize on expected growth as the affluent “baby-boomer” generation begins to retire over the next 15 years. The company also wants to grow its fledgling consumer loan business and expand in the U.S. to balance its foreign operations. With combined equity over $200 billion AIG/Am Gen would rival Citigroup Inc. as the world’s largest financial organization.

The counteroffer wasn’t a spur of the moment move. Greenberg acknowledged that his interest went back six to eight months and that he and Devlin had talked about it at a breakfast meeting at his apartment, but that neither had followed up their conversation.

With $23 billion on the table and an offer to Devlin to become a vice chairman of AIG with a seat on its board, the two now have plenty to talk about, and Greenberg’s in a hurry.