MONY, or the Mutual of New York Life Insurance Company, came into being many years ago, with the sale of its first life insurance policy executed in the year 1843. It had been initially owned by its policyholders, following which demutualization took place in the year 1998, with a replacement by public offerings. The acting CEO had estimated profits, which unfortunately turned into great losses for the company, with a loss as high as $23.3million in the year 2002. However, later the same year, credit rating agencies downgraded the company’s senior debt, and they began making short-term investments, to protect their position in the corporate market.
The reason behind the downfall of the business, was, their weak management, as well as the economic downturn, which had affected the economy world over. Sales in the life insurance sector were widely affected, and the technology and telecom sectors were also facing bond defaults. This in turn affected the range of resources that the insurers had to cover up their burdens from the policies sold.
Management’s Incentives to Arrange a Friendly Takeover
The France based life insurance group, AXA, was interested in achieving sales growth in the USA, by incorporating with MONY. They could help each other out in attaining profits, because despite MONY’s incompetence at this stage, it still had certain important growth locations in the country, which could benefit AXA. On the other hand, AXA had some new life-saving products that could be of much use to MONY, in their policy provisions.
Many analysts complained that AXA’s offer to MONY was a low one, and MONY should not accept it. But the CEO Michael Roth stated that it was a good deal because of the matching operating styles of the two companies, and the way interdependency could be of advantage to them. MONY had been weak in performance since demutualization but was now hopeful of gaining its previous position back in the markets, by merging with AXA. There were certain changes in control contracts (CICs) that were renewed, and followed, according to which the compensation to be paid to the CEO would be $90 million, but in actual was amounted to $22.7 million.
AXA had chosen to finance the cash offer through debt securities, of ORANs (Obligations Remboursables en Actions ou en Numéraire). This way, the AXA would not have to face any new equity financing on its books.
The Takeover Bid
AXA’s offer in September 2003 of $31 per share in cash, was accepted by MONY. MONY got around $1.5 billion for the 47 million shares it withheld. Alongside, AXA would have around $850 million of MONY debt. This offer was 6.2% above the closing price of the MONY closing price a day before the agreement. However, on the day following the agreement, the shares in AXA rose to 3%, which rose MONY’s share by 13% too.
The deal was a good one, which would benefit both parties involved, and since AXA already held a stable position in the international market, the bid made would favor MONY, who was trying to get some relief from its instability lately.
The Use of ORAN
ORAN was used by AXA for the AXA MONY takeover deal. AXA issued 110,245,309 ORANS. If the deal was not executed by December 22nd, 2004, the ORANS would pay their face value of €12.75, along with an interest of 2.4% per annum. Whereas, if the plan was executed, the ORANS would convert into one stock of new AXA shares; each ORAN would be a new AXA stock. There was a rights issue of the ORANS to AXA. For each AXA share, shareholders could get one warrant. And one ORAN could be issued for every 16 warrants. Each ORAN would cost €12.75. This was a 22% discount to the price of the AXA shares, €16.37, and was termed a reasonable price for holders.
Evolution of the MONY Stock Price
Several shareholders were against this acquisition because according to their view $31 per share would be very a cheap price for MONY and that such acquisition will be a loss for the company. However, MONY argued that if the current bid from AXA $31 per share is cheap then another bidder with a better price per share would come up. They said that if MONY would reject this deal would result in slip in the stock price and downgrades of credit. MONY delayed the vote scheduled for 24th Feb because of the lawsuit from shareholders. It delayed the vote.
The debt that Axa will incur to issue the fund for the purchase of MONY will be convertible to AXA stock. Several shareholders and urged to vote against this acquisition. ISS as an investment advisory group is a strong body and its decision has a great influence on independent shareholders. Those against the deal represent 15% of the company’s shares including Highfields Capital Management, Southeastern Asset Management, and Third Avenue Management.
Outcome of the votes depends on the MONY shareholders who comprise half-million small retailers. MONY’s 50 million shares have more than 40% shares in hands of these small retailers. Of these many were policy holders in 1998 when the company was demutualized. Though many shareholders have lost their shares and now have only few shares but still company want to have their vote in favor of the company to get strong numbers. MONY shares when closing below the AXA’s offer price then acquisition with AXA would be in favor of the company.
References
Perold, A.F & White, L. (2007) AXA MONY. Harvard Business School.