‘WSJ’ Comments On Validus’ Hostile Bid
The “Wall Street Journal” [WSJ] this week suggested that by going hostile in its takeover attempt, Bermuda’s Validus Holdings may have doomed its own bid to acquire the American reinsurer at the centre of a months-long bidding war involving some of the industry’s most prominent power players.
In a commentary on Validus’s efforts to purchase New York-based reinsurer Transatlantic Holdings, the “WSJ” said the Bermuda company had demonstrated the inherent disadvantage of a hostile bid.”
“Over the last five months, Validus Holdings at each turn chose the most hostile path available in its attempt to take over Transatlantic Holding,” said the business newspaper. “And at the moment it looks like it is losing. Transatlantic agreed to a deal with Alleghany, which Transatlantic concedes provides a ‘minimal difference in current market value’ And indeed based of recent trading may provide less.
“Validus’s choice demonstrates the inherent disadvantage of a hostile bid. Perhaps Validus would not have gotten as far as it did without its aggressive tactics, but unless it adds another chapter to this saga, Validus’ history of hostility towards the management of Transatlantic looks like it has mortally hurt its bid.”
A provider of reinsurance and insurance, Validus Holdings Ltd. conducts its operations worldwide through two wholly-owned subsidiaries, Validus Reinsurance, Ltd. and Talbot Holdings Ltd.
Validus Re is a Bermuda based reinsurer focused on short-tail lines of reinsurance. Talbot is the Bermuda parent of the specialty insurance group primarily operating within the Lloyd’s insurance market through Syndicate 1183.
In June, Transatlantic had signed up a deal to merge with Allied World. A few days before the deal was announced, Validus had made unsuccessful overtures to Transatlantic which had been rejected.
“Then In July, Validus made a proposal to top the Allied World deal,” said the newspaper. “Transatlantic’s board declared that bid to be ‘reasonably likely’ to result in a ‘superior proposal’. Those are the key words that permit the opening in negotiations, which were otherwise prohibited by Allied’s — and almost all other — merger agreements.
“Validus then faced a dilemma. If it signed the required standstill, it would be dependent on the judgment of the Transatlantic board in deciding which deal was better. If it refused to sign, it retained the right to do hand-to-hand combat with the Transatlantic board. It chose the latter. Relations between the two companies quickly deteriorated, likely sealing Validus’s fate.”
At the Transatlantic board meeting last Sunday it was decided there was a “minimal difference in current market value” between Validus’s proposal and Alleghany’s bid, which the board later accepted.
“So the board looked at other things, including the fact that Alleghany fully negotiated a deal and might walk if Transatlantic spent more time with Validus,” said the “WSJ”. “The board also considered three contentious issues with a Validus deal: Validus’s capital management plan, ratings agency issues and estimates of potential synergies.
“In short, the board felt more comfortable working with Alleghany on a friendly deal than risking trying to do a deal with cantankerous Validus.
“No doubt Validus would blame Transatlantic for the deterioration of the relations and also claim irrationality — or perhaps something more nefarious — in Transatlantic’s dissing Validus at every turn.”
The newspaper said without judging who was right and who was wrong, the failed Validus deal clearly demonstrates the pitfalls of going hostile.
“The decision to do so is an enormously important strategic decision and, in a competitive situation, can be a huge disadvantage in a negotiated endgame,” said the “WSJ”. “If Validus had signed up the standstill last summer, it would have been precluded from launching a hostile bid. But it also could have negotiated with the Transatlantic board, which had the power to declare it the winner last summer if the board believed the Validus bid was better than Allied’s.
“Of course, the Transatlantic board could have decided it preferred Allied, leaving Validus without options.
“Neither decision was clearly right or wrong. It was all a question of which path was more likely to succeed: a friendly approach to the board or opposing and attacking the board at the shareholder level.”
The newspaper said while at the moment Validus’s hostile approach has not worked, the battle for Transatlantic may not be over.
“Alleghany’s shares have tumbled since the deal announcement,” said the newspaper. “Validus’s last offer is now more than the current market value of the Alleghany bid. But Validus has some problems in proceeding. To win now it would effectively cost it $115 million — about $1.85 per Transatlantic share –more in cash thanks to the Alleghany deal’s breakup fee.
“And Validus still would have to convince either the Transatlantic board or the shareholders that it has resolved the alleged weaknesses in its bid. Crossing those hurdles could be a tall order.”
