It has not been a good year for mergers and acquisitions in the insurance sector in Asia. The strategic rationale for these deals is compelling: insurance firms are keen for further exposure to Asia to increase their growth rates and penetration potential, while shareholder exits are being driven by the need for Western players to shore up capital or downsize their businesses to satisfy concerns that they are spreading themselves too thin.
But shareholders and regulators are not on board in all cases. And this has resulted in a spate of failed deals that have consumed a lot of management time and effort but left the buyers and sellers (and their advisers) with little to show for their work.
Last Thursday the Australian Competition and Consumer Commission (ACCC) rejected a A$13.3 billion ($12.2 billion) proposal by National Australia Bank (NAB) to acquire Axa Asia Pacific, the regional assets of French insurance major Axa. It was the third Asian insurance deal in just a few months to fail and the second not to pass the scrutiny by regulators.
The ACCC had already voiced its opposition to the takeover in April on grounds that the deal would reduce competition in the retail investment platform market. To allay the ACCC’s concerns, NAB and Axa had agreed to sell the North Platform administration business of Axa Asia Pacific, a move which was announced after extensive discussion with the ACCC, said a specialist.
"The proposed undertakings offered by the parties do not provide sufficient certainty that the ACCC's competition concerns will be addressed," ACCC deputy chairman Peter Kell said while ruling against the deal.
NAB is being advised by J.P. Morgan and Nomura, while Axa Asia Pacific is taking advice from Macquarie, and Axa France is being advised by Deutsche Bank. Fund manager AMP, who was the runner-up for acquiring the business and is now expected to come back to the table, is being advised by UBS.
M&A deals always have a probability of success attached to them, from the time they are pitched to the client by the investment bank. Revenue expectations for deals are probability-weighted in financial forecasts, so deals that are perceived to have a very high degree of uncertainty even after announcement are typically weighted with low success probabilities. And some of the deals which have failed recently in the Asian insurance sector were perceived as high risk. However, the fact that the deals were announced means the acquirer, the seller and the advisers had developed some degree of confidence that the deals would get across the finish line.
Another failed deal -- but for different reasons -- was British insurer Prudential's $35.5 billion bid to buy AIA Group, the Asian life insurance unit of American International Group (AIG). It was a deal which would have transformed Prudential into a player deriving the majority of its profits from Asia.
Prudential’s advisers (Credit Suisse, HSBC and J.P. Morgan) had been set to bank a fee which some specialists said would have been “one of the highest-ever earned in the FIG [financial institutions group] sector”, which is not entirely surprising when considering that the deal ranked as the largest insurance-sector M&A ever and the largest Asia ex-Japan M&A deal in any sector. Advising AIG on the sell-side were Citi, Deutsche Bank and Goldman Sachs, along with Blackstone. Morgan Stanley advised the US Federal Reserve.
But analysts voiced doubts about the deal from the time it was announced and Prudential’s share price was hammered by investors who were not convinced that the strategic rationale justified the outlay. In early June, the deal was aborted.
Some specialists believe that one of the challenges currently facing Western buyers is convincing stakeholders that the price they are paying for acquisitions in emerging markets is justified. But sellers in emerging markets expect to be paid a premium for the fact that these businesses are still showing healthy growth and have seen limited, or in some cases even no, impact of the subprime-sparked issues which have caused many of their peers in the developed world to slow down.
Since the AIA trade sale was abandoned, AIG has announced that it will proceed with an initial public offering of AIA instead, resuming the original divestment plan that was halted when Prudential put a takeover offer on the table. Deutsche Bank, Citi, Goldman Sachs and Morgan Stanley have been appointed global coordinators, and following intense lobbying by all other investment banks at senior-most levels, Bank of America Merrill Lynch, Credit Suisse, UBS, CCB International and ICBC International have been added as joint bookrunners.
AIG is having difficulties getting rid of other Asian assets too. At the end of last month, Taiwan regulators blocked the takeover of AIG's Taiwanese life insurance business, Nan Shan Life Insurance, by a consortium led by private equity investor Primus Financial. The $2.15 billion acquisition was announced almost a year ago and the parties had been in close negotiations with the Taiwan regulators ever since, in an attempt to overcome concerns about the potential involvement of mainland Chinese money in the bid, among other issues. AIG was being advised on the sale by Morgan Stanley and Blackstone, while Primus was taking advice from Deutsche Bank.
Others in the fray to acquire Nan Shan when the original auction was run were Chinatrust Financial Holding Company, Cathay Financial Holding and Fubon Financial Holding. All three are Taiwan-based financial services groups and specialists expect "one or more of them may be willing to come back to the table again, although the ball is currently in AIG's court".
However, they noted that the bids received in 2009, when Primus emerged the winner, were not strictly comparable as each had different conditions attached. Hence, rumours about how close the bidding was are hard to quantify. Some specialists argue that the “noise” now attached to the deal and the fact that AIG may be in a somewhat weaker negotiating position could adversely impact how much money the US insurer will get.
Banks advising AIG on the sale of Nan Shan and Axa on the sale of the Asia-Pacific assets may still end up earning money from these deals -- if another buyer comes to the table. However, in both cases, given the amount of time that has lapsed since the process was first run, a significant information update on the target will probably be required. And then negotiations and price discovery will start anew.
The financial services sector world over is highly regulated. Thus, even though the specific rules and regulations governing acquisitions are different in each country where the target is, one commonality, specialists say, is that deals will always be subject to intense scrutiny by regulators.