American General O.K.’s Talks With AIG

American General’s board of directors inched a step closer to American International Group, and a step further away from Britain’s Prudential plc, on Monday, when it voted to authorize its management and advisors, Morgan Stanley, to meet with AIG and further explore the terms of its counteroffer.

“After a review of currently available information and consultation with its advisors American General’s board determined that AIG’s offer would reasonably be expected to result in a ‘Superior proposal’ for American General’s shareholders, as defined in American General’s merger agreement with Prudential plc dated March 11, 2001,” said the announcement.

The board emphasized that the discussions with AIG did not signal acceptance of its offer, but were required as a fiduciary duty on the part of its management to act in the best interests of its shareholders. It reiterated that it considered that “its merger agreement with Prudential plc remains in full force and effect.”

Nonetheless, the decision opens the door a bit wider for AIG, and closes it a bit more for Prudential. AIG CEO Maurice ‘Hank’ Greenberg has indicated that his offer is conditioned upon a “due diligence” review of Am Gen’s finances, and this requirement could be expected to proceed as part of their discussions. AIG could then make a more formal offer than the one contained in Greenberg’s April 3rd letter to Am Gen CEO Robert Devlin.

The finding that AIG’s offer may constitute a “superior proposal,” which at present appears to be the case, would leave Am Gen free to accept it upon confirmation. Pru could still expect to collect a $600 million breakup fee, however, and this will quite likely be a factor in Am Gen’s discussions with AIG. Bolstered by that much cash Pru might very well pursue other acquisition targets in the U.S.