M&A: turning hostile
Allied World and Transatlantic agreed an initial stock-forstock merger worth $3.2 billion on June 12—valued at $2.91 billion by August 16. However, a competing offer of $3.5 billion in cash and stock was fielded by Validus a month later on July 12, although the deal faced a similar depreciation in value to $2.98 billion by August 16 as the equity markets took a pummelling. Allied World’s initial offer had appeared to be a good fit, but concerns were expressed by certain of Transatlantic’s shareholders that the deal was too cheap, with interest evident in the Validus offer.
Validus’s competing offer was however not followed up with substantive talks, and following a provision that gave the Transatlantic board the ability to block the deal as a prerequisite to further discussions, Validus chose instead to approach Transatlantic’s shareholders directly with a hostile offer. Transatlantic responded by adopting a poison pill provision in order to ward off Validus’s advances and is suing Validus in federal court in Delaware, alleging it made “false and misleading statements” to shareholders, whilst Validus raised the stakes still further by counter-suing Transatlantic and attacking Allied World’s offer in an open statement to Transatlantic shareholders.
A further twist saw the entry of Berkshire Hathaway with an unsolicited offer of $3.25 billion. The move, described as being out of the ordinary for a firm that traditionally engages in friendly takeovers, is set to make it a three-way tussle for Transatlantic’s hand. And it is not the first time that Berkshire Hathaway and Validus have been at the centre of a show of strength, the two having previously flexed their muscles during the IPC Holdings deal back in 2009, with Validus emerging as the winner that time around.
This time, matters are far from clear, and with Berkshire Hathaway entering the fray, it seems likely that there will be further twists in what is set to be a protracted marital tussle for Transatlantic’s hand.
Allied World presents its offer as the best fit for the two firms, highlighting the companies’ shared histories and the complementary nature of their respective books of business. The deal also raises the prospect of redomiciling the company’s combined headquarters to Switzerland—Allied World’s present home—with the Alpine state being more favourable to a combined entity from a tax perspective.
Validus has likewise set forward its case, stating that synergies between its predominantly short-tail business and Transatlantic’s large premium and reserve base would result in a better spread of risk than the competing Allied World offer. Validus also foresees savings from eliminating Transatlantic’s public company costs and by restructuring the company’s legal entity such that non-US subsidiaries are no longer controlled foreign corporations.
Berkshire Hathaway, for its part, has offered $52 for each of Transatlantic’s 62.5 million outstanding shares. Whilst the Berkshire Hathaway offer currently trumps both previous bids in terms of instant value to shareholders, there would be no opportunity for those presently holding shares in Transatlantic to receive share dividends going forward, whilst the cash only offering would mean that the deal is entirely taxable. Both factors may well put a dent in the offer, even if on paper it remains the superior bid.
The offers from Allied World and Validus appear to be an attempt to increase the scale of their operations in a market in which bigger is generally regarded as better. A deal for either player would help to propel them into the upper echelons of the reinsurance sector. A search for size is not something that Berkshire Hathaway really needs concern itself with, but it is evident that its National Indemnity arm sees synergies with Transatlantic’s book of business, and Buffet, the opportunity of a shrewd and timely deal.
The move may see the start of further M&A activity, but with book values still running at sub-multiples across the industry, it seems unlikely that there will be much investor appetite to pursue new mergers and acquisitions unless real opportunities are perceived in such deals.
It remains unclear as to which of the competing offers will finally secure the hand of Transatlantic, and it seems likely that there is still plenty of time for belligerent debate regarding possible combinations, but whatever the final outcome, the deal will be a significant piece of M&A for the industry. Developments will undoubtedly be watched with interest.