AIG Tops Prudential Bid For American General

April 4, 2001

No one has ever accused AIG’s legendary CEO, Maurice “Hank” Greenberg, of thinking small, and the Tuesday night bombshell he dropped into the merger plans between Prudential U.K. and Houston-based American General will certainly enhance that reputation. In a “Dear Bob” letter AIG outlined a counteroffer to Am Gen for an all stock deal worth an estimated $23 billion.

The well prepared merger plan has a very good chance of succeeding. Prudential’s original offer, likewise an all stock deal, was valued at around $26.5 billion, but a precipitous drop in Pru’s share price has reduced its offer to around $38.60 a share and the total value to around $20 billion.

The opening paragraph of Greenberg’s letter to Am Gen President Robert Devlin states, “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.”

AIG’s offer values Am Gen’s shares at $46, a 25 percent premium over its recent price, and contains a provision to minimize any drop in the value of AIG shares. Am Gen shareholders would receive between 0.5462 and 0.6037 shares of AIG, depending on the price level. The stock was trading at around $80 a share at the close on Wednesday.

Greenberg’s proposal, which has been approved by AIG’s board, offers some non-monetary incentives as well. He pointed out that the company believes in a “decentralized approach,” that would leave Am Gen largely intact. He also invited Devlin to join AIG’s Board of Directors and assume the role of vice-chairman.

For the moment neither Am Gen nor Prudential are saying very much. After acknowledging that it had received ” an unsolicited, competing offer from American International Group,” Am Gen said only that it “will be carefully considered by the company’s board of directors,” and that any decisions would “be in the best interest of its shareholders.”

Pru said only that its “merger agreement with American General remains in full force and effect.” A defection by Am Gen would trigger a $600 million termination payment.

Greenberg seemed to be fully aware of all the consequences inherent in AIG’s offer. 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.” He also wrote, “Our clear determination is to reach a three-way, resolution in a professional and constructive manner that will benefit all shareholder groups involved.” Maybe he has plans for Prudential as well.

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