Pru/Am Gen Merger Tops Insurance Deals

Last January, Prudential plc Chief Executive Jonathan Bloomer indicated he was still looking for opportunities in the U.S. The search culminated March 12 in Houston, Texas, with the announcement that Britain’s venerable “Pru” (no connection to America’s Prudential Insurance Co.) would acquire American General Corp., the U.S.’ second-largest publicly held life insurer for the equivalent of $26.5 billion in stock.

Under Bloomer’s leadership, the 150-year-old Pru, a pillar of Britain’s financial establishment, has been expanding in Europe and Asia, adding new pension and financial management products to its basic life insurance business. Two years ago, it launched “Egg,” an online bank.

The insurer’s main U.S. presence, however, consists of Jackson National Life, the 20th largest. With $7.2 billion in gross sales last year, it’s considered too small to achieve the market share and economies of scale necessary to compete on equal terms with the U.S.’ biggest life insurers, and to enable Pru to become a viable player in the U.S. market.

Joining with American General-total assets in excess of $120 billion; 16,000 employees and more than 12 million customers; gross revenues and deposits over $22 billion last year-will change that. The Houston headquarters oversees a nationwide network, providing retirement plans, life insurance, consumer loans and investment management.

Prudential/Am Gen would become the world’s sixth largest insurance group with combined capital of more than $45 billion and assets under management totaling $336 billion. This financial clout and extended operating network places it on a par with France’s AXA, Germany’s Allianz, Holland’ s ING and Aegon, and U.S. giants AIG, Chubb, Met Life, etc.

The merger plan calls for Am Gen shareholders to receive 3.622 new Pru shares for each Am Gen share, valuing them at $49.52, nearly a 30 percent premium above the recent $38.25 closing price, and double their value of a year ago. By comparison ING’s recent purchase of ReliaStar carried a 17-percent premium. Their respective shareholders will receive a formal proposal by late second quarter 2001. Assuming shareholders and regulators approve it, closing is targeted for late third quarter 2001.

Industry analysts generally agree that the two companies-who started as classic life insurers, but have been expanding into other fields-are very compatible. Bloomer certainly feels that way. “Our two companies are a great fit,” he stated. “We have highly complementary business operations, and we have pursued very similar strategies by broadening our product ranges and distribution channels. Not only will this give us a leading position in the U.S., it gives us the scale and financial strength to allow for continued expansion and faster growth in the other regions of the world in which we operate.”

At this point there seems little likelihood that the merger won’t be consummated. If Am Gen’s Board withdraws its favorable recommendation, or accepts another bid, it would trigger a rather substantial termination payment of $600 million, which would also be owed if the shareholders reject the deal. Pru would be obligated to pay a lesser amount, $347 million, if it backs away.

Both companies also reinforced their commitment by giving up plans to bid for fund manager Liberty Financial. Although some European companies have expressed interest, their action eaves AIG as the only U.S.-based insurer reportedly seeking Liberty.

While billed as a “merger of equals,” the eventual ratio of the combined companies would be 50.5 percent Pru to 49.5 percent Am Gen. Bloomer will head the group from Pru’s London offices, and Devlin will join Pru’s Board as Deputy Chairman and CEO of North American operations. Jackson National’s operations will be integrated into Am Gen’s and the head offices for North America will move to New York City, while the operational centers remain in Houston, and Lansing, Mich.

The apparent compatibility of the two companies is welcome news for their employees. Unlike some other recent deals in the financial services sector, no massive job cuts are planned, while cost savings are estimated at around $130 million annually.

Am Gen spokesman John Pluhowski indicated that while some 225 positions will be eliminated, there are currently at least 300 openings in Houston alone, and the New York office will require 30 to 40 additional staff. “We will do everything possible to minimize the impact on employees through redeployment,” said Pluhowski.

The only controversy so far comes from financial analysts, who have questioned the premium Pru is paying. Its shares dropped 14 percent when the merger announcement was made. One analyst told the BBC that the insurer was “paying a $6-billion premium for American General, and will only achieve increased income in the $1-billion range. That’s a $5-billion loss.”

The high price not only dilutes existing investors’ stake in Pru, which has made its institutional shareholders unhappy, but also comes at a time when the U.S. economy is slowing down. Pru representatives have been holding meetings with big investors to explain the merger and justify the price; and its shares have since recovered somewhat. The fact is that entering the U.S. market is expensive, but necessary, if an insurer wants to have a truly global business.

The Pru/Am Gen merger is the latest in a series of acquisitions by European insurers and financial service companies looking for a share of the U.S. market.

The powerful U.S. economy is one reason. It has generated a lot of money and created more opportunities for management firms. Another reason is simple demographics. Almost 25 percent of the U.S. population is between 45 and 65; these “baby boomers” are now in their most financially productive years.

Topics Mergers & Acquisitions USA Carriers Europe