Prudential plc made a $22.3 billion offer to acquire life insurance provider American General last month, and Prudential's stock price plummeted. Now AIG has entered the fray with a larger offer. But Prudential doesn't think AIG has its regulatory ducks in a row, and is crying foul for its damaged deal. Sometimes in securities law, an offer is not really an offer. Billions of dollars may rest on a court's definition.
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You don't think the impending retirement of millions of American baby boomers is a big event for insurance companies? Two of the mightiest insurers in the world have engaged each other in a multibillion-dollar donnybrook over the opportunity to purchase American General Corp. (NYSE: AGC), a leading U.S. provider of retirement services and fixed and variable annuities. Now, one of the suitors is crying "foul," bringing suit against the other. What could have been a sweet victory for one now threatens to become a legal morass for both. One month ago, Prudential plc (NYSE: PUK) made an all-stock offer to buy just over 50% of American General, valuing it at $22.3 billion. Unfortunately, Prudential's offer proved wildly unpopular among its shareholders, who questioned the premium associated with the deal. Prudential's stock has tanked as a result, taking the value of its offer down as well. Enter FOOL 50 component American International Group (NYSE: AIG), one of the most powerful insurers in the world, which last week announced that it was mulling a $23 billion counteroffer for American General. Prudential has stated it would not sweeten its offer with cash, meaning that AIG's offer may be sweeter. Certainly the AIG deal would make sense for both parties. Though AIG is an American company, nearly 90% of its business is overseas. In order to take advantage of the burgeoning U.S. retirement market, AIG would either have to build it from scratch, or go out and buy it. Given the unpopularity of the deal among Prudential shareholders, AIG has elected to swoop in and investigate a takeout of American General. This move has not gone over well with Prudential, which desperately needs the $1 billion in projected annual cash flow from American General to fund its Asian expansion and service both the debt from its prior acquisitions and the bleeding bottom line of its Internet bank, Egg. Prudential's deal with American General calls for a $600 million breakup fee, which would help salve the wound should American General go with AIG. Evidently, though, it is not enough for Prudential, which has sued AIG under U.S. securities law for "gun jumping" and "tortiously interfering" with its acquisition. Here's where the whole mess gets interesting: AIG is claiming that it has not actually made an offer, and that it must first complete its due diligence of American General. But securities law differs from contract law in that public announcements of intentions, press releases, and other utterances can be considered "offers." As such, Prudential is claiming that AIG made an offer without having securities available for exchange, which is a no-no under the U.S. Securities Act. A U.S. company must file a prospectus with the SEC before any offer to sell its securities. American General's management, for its part, says it has a fiduciary responsibility to its shareholders to consider any offer from AIG. As such, it has agreed to meet with AIG to discuss its proposal. Should American General agree to the AIG terms, the Prudential legal action could cause considerable delays and expense to AIG on top of the breakup fee American General will have to pay. Regardless of the outcome of any lawsuit, a victory by AIG in the quest to acquire American General will come at an enormous cost to Prudential, whose management has taken significant heat for its recent performance even prior to its unpopular bid for American General. Analysts have estimated that the combination of a poor premium environment in Britain's life insurance business, losses over Egg, and debt servicing due to a 1999 takeover of a U.K. mutual fund company have conspired to push Prudential into cash-flow negative territory. The loss of a strong position in the U.S., along with that $1 billion in potential cash flow -- and compounded by existing shareholder displeasure -- could prove disastrous for a company trying to regain its footing. Bill Mann's combined ratio dropped below 100 for the first time this past February. Bill did not hold any of the stocks listed in this article. The Motley Fool is investors writing for other investors.
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