AIG Tops Pru’s Bid for American General

No one has ever accused American International Group’s (AIG) legendary CEO, Maurice “Hank” Greenberg, of thinking small or being timid. He reinforced his reputation on April 3 with a letter to American General CEO Robert Devlin, which outlined a $23-billion counteroffer to acquire Am Gen out from under its previously announced merger partner, Britain’s Prudential PLC (see IJ, March 26). Citing the experience of subsidiaries Sun American, acquired in 1998, and Hartford Steam Boiler, acquired last year, Greenberg 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’re quite comfortable with both the potential for growth and the potential for expense savings.”

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

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 very clear that neither the price nor the 5 percent collar were negotiable. 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. 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 occuring frequently in corporate bidding wars. 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 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, which would allow AIG to make a more formal offer than the one contained in the letter.

With total assets of $120 billion, offices in 40 states and 16,000 employees, Am Gen is a leader in annuities, life insurance and real estate, and consumer financing—exactly the areas Greenberg singled out for potential growth.

With combined equity over $200 billion AIG/Am Gen would rival Citigroup Inc. as the world’s largest financial organization.

Greenberg acknowledged that his interest went back six to eight months and that he and Devlin had talked about it previously, 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. In his letter, he urged Devlin to meet with him “as soon as possible to discuss and negotiate our proposal in greater detail so that we can achieve a prompt agreement.” In response to a question as to how long he thought negotiations would take, he replied, “Less than five months, considerably less.”

The fight to take over Am Gen heated up measurably April 10. Its application for a temporary restraining order, which in effect would have immediately prohibited AIG from continuing its offer until it complied with applicable regulations, was denied by a Texas court. However, Am Gen agreed to a hearing the week of April 16 on Prudential’s application for a temporary injunction aimed at obtaining the same relief.

Topics AIG