Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
Shares of HCC Insurance Holdings (UNKNOWN:HCC.DL) rose as much as 37% on Wednesday after the specialty insurer announced it is being acquired in a cash deal by Japanese non-life insurer Tokio Marine Holdings (OTC:TKOMY) for $78 per share. The acquisition price is a 38% premium to yesterday's closing price and values HCC Insurance at $7.5 billion.
Abenomics, the new economic order spearheaded by Japanese prime minister Shinzo Abe, appears to be having some effect on animal spirits at the top of Japanese companies. According to The Wall Street Journal, Japanese corporates have announced $50.1 billion worth of foreign acquisitions so far this year -- close to the $53.4 billion total for all of 2014.
Saddled with a domestic market with unfavorable demographics, Tokio Marine's rationale for the acquisition is clear: It says adding HCC will raise the proportion of total profits earned internationally to 46% from 38%.
This deal will happen. For one, there is very little overlap between Tokio Marine's and HCC Insurance's activity, so there are no antitrust concerns. Second, the transaction isn't dependent on financing. Finally, Tokio Marine is paying a full price for these assets, so we shouldn't expect anyone to throw their hat in the ring with a higher offer.
On the last point: The $78 per-share acquisition price values HCC at 1.9 times book value. Even Tokio Marine president Tsuyoshi Nagano admitted at a Tokyo press conference: "The company is indeed expensive. The stock price from the start was high, so we put a premium so we can gain control." As such, this looks like a reasonable outcome for current HCC shareholders.
Despite this, it's not necessarily a bad deal for Tokio Marine. HCC has built a very good franchise in specialty insurance -- one of the only ways in which insurers can earn above-normal returns -- and is nicely profitable: Its average net profit margin over the decade through 2014 is an enviable 13.8%.