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Will This Deal Sink Markel?

By Matt Koppenheffer – Dec 19, 2012 at 1:49PM

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Investors reacted harshly to a big acquisition by Markel.

It would appear that something went terribly wrong at Markel (MKL -1.90%) today as the stock fell as much as 10% so far in today's trading.

The driver of the plunge was the announced acquisition of Alterra Capital (NASDAQ: ALTE) for roughly $3.1 billion. Markel -- which is often tagged a "baby Berkshire" because of similarities with Warren Buffett's Berkshire Hathaway (BRK.A -0.83%) (BRK.B -0.40%) -- is diversifying its book of business with the deal, as Alterra focuses on the reinsurance market. In fact, the deal probably makes Markel look even more like Berkshire since Buffett's conglomerate has a significant reinsurance practice.

To some extent, the market's negative reaction may be driven by the potentially dilutive nature of the deal -- it's a combo cash and stock deal, which means that Markel will be issuing new shares. A frosty reception from Wall Street analysts may be playing into the drop as well. Bloomberg spoke to Stifel Financial's (SF -1.12%) Meyer Shields, who said:

Our initial reaction to the deal is negative. We have enormous respect for Markel's underwriting and investing expertise, but we think its [merger and acquisition] track record is frankly less impressive.

I'm not as convinced that long-term Markel shareholders should be concerned. The company is paying a modest premium on tangible book value to buy Alterra, which is still a serious discount to how the market values Markel. It's also diversifying its business which, if it makes sure that Alterra can match Markel's underwriting quality, could lead to better, more stable earnings. And given Markel's success not only on the insurance side of its business, but also on the investing side, I'm apt to give it the benefit of the doubt when it comes to making valuable purchases. 

That said, this isn't an open-and-shut case of market overreaction. Questions that should be on the forefront of investors minds as they look over this deal include:

  • If Markel is using stock to pay for part of this deal, what does that say about its view of its own stock's valuation?
  • Has growing through acquisition truly been a value-destroying strategy at Markel?
  • Do the quality and results at Alterra provide confidence that this will integrate well and be a long-term contributor to Markel's business?

Markel's stock -- not unlike that of its larger model, Berkshire -- doesn't swing like this all that often. For investors that are comfortable with this deal and have had Markel on their radars, this could be a pretty sweet buying opportunity.

Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway and Markel. Motley Fool newsletter services recommend Berkshire Hathaway and Markel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Berkshire Hathaway (A shares) Stock Quote
Berkshire Hathaway (A shares)
$420,667.49 (-0.83%) $-3,512.51
Berkshire Hathaway (B shares) Stock Quote
Berkshire Hathaway (B shares)
$279.36 (-0.40%) $-1.13
Markel Stock Quote
$1,148.80 (-1.90%) $-22.26
Stifel Financial Stock Quote
Stifel Financial
$56.58 (-1.12%) $0.64

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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