Doubling your business and becoming No. 2 is not necessarily difficult so long as you merge well. With a $16.4 billion stock swap, St. Paul (NYSE:SPC) and Travelers Property Casualty Corp. (NYSE:TAPa) accomplished just that yesterday, making St. Paul Travelers the second-largest commercial property insurer in the U.S. to American International Group Inc. (NYSE:AIG).
Okay, mergers are not always easy. In fact, history shows that they often fail, as the price tag tends to be too high and integrations are not well planned. Well, in this transaction, there is no premium. Rather, it is a merger of equals. What's more, both companies have tremendous experience integrating big-time mergers.
There's another interesting wrinkle: The current CEO of St. Paul's, Jay Fishman, was several years ago the CEO of Travelers Insurance. Having been on the other side is always a big plus.
As mergers go, this one also makes a lot of sense in terms of the financials. Fishman believes there will be $350 million in cost savings by the third year and $750 million in revenue synergies. The top-line growth looks fairly conservative, as both companies have complimentary businesses.
But the fact remains that the property and casualty business is difficult. There are big unknowns for investors to ponder, such as the exposure to asbestos and mold. After all, Citigroup (NYSE:C) spun-off 90% of Travelers citing concerns about industry trends and underperformance.
So, St. Paul and Travelers are right to bulk up to meet these challenges. The deal should also spark a wave of consolidation in the industry and may well affect companies like CNA Financial (NYSE:CNA) and XL Capital (NYSE:XL).
The bad news for investors: The Travelers-St. Paul deal will likely be a model, where there is a low chance of a hefty premium.
Tom Taulli is the author of six books on investing and finance, such as the Complete M&A Handbook (Random House). He is also a professor of finance at the USC School of Business (don't worry, he does come out of his ivory tower). You can reach him at [email protected].
