Los Angeles-based annuity marketer SunAmerica on Thursday agreed to a $16.5-billion buyout by insurance powerhouse American International Group, a deal that some analysts say could achieve something accomplished by surprisingly few mergers: the uniting of two companies whose businesses actually complement each other.
Many companies promise such "synergies" to justify the hefty price tags of their deals. But many marriages fall short of expectations when the companies discover how tough it can be to sell to each other's customers.
With AIG and SunAmerica, however, the hoped-for benefits may actually materialize, many analysts say.
SunAmerica is a fast-growing seller of investments to retirement-conscious baby boomers, but it lacks operations in potentially enormous foreign markets.
AIG, meanwhile, is a global insurance and financial services giant that can give SunAmerica immediate entree overseas.
"If there ever was a [case] for a synergistic merger, this is it," said Charlotte Chamberlain, an analyst at Jefferies & Co. in Los Angeles.
The deal's promise hinges in part on the idea that foreigners, particularly those in Asia, realize they must take a more active role in planning for their retirements, just as many Americans have done in recent years.
"It's very simple," said Maurice "Hank" Greenberg, AIG's chairman and chief executive. "Retirement savings and the asset accumulation associated with it is going to be one of the biggest businesses in the world."
The deal calls for New York-based AIG to exchange 0.855 of its shares for each of SunAmerica's 220 million shares.
The bid price was a 26% premium over SunAmerica's closing share value on Wednesday, and a lofty five times SunAmerica's book value, or net worth.
On Thursday, SunAmerica shares shot up $7.13 to $71.38 on the New York Stock Exchange. AIG stock fell $7.13 to $87.50, also on the NYSE, its biggest one-day slide in a decade but not entirely surprising given that stocks of many acquirers fall when buyouts are announced.
For shareholders, the merger is planned as a tax-free exchange of shares.
The deal was hatched during a meeting between Greenberg and Eli Broad, SunAmerica's chairman and chief executive, and was put together in just three weeks. AIG is rumored to have made several previous buyout offers, Chamberlain said, but Broad apparently thought the earlier bids were too low.
If approved by shareholders, the union would represent the insurance industry's second-largest merger this year, after Berkshire Hathaway's $22-billion deal for General Re, unveiled in June.
SunAmerica will remain based in Century City and plans no layoffs.
SunAmerica has achieved tremendous success in the 1990s by selling annuities--tax-deferred financial products that combine insurance with a long-term investment vehicle. Its annuities are hawked by an army of 9,500 brokers and financial planners nationwide.
Boosted by fast-growing sales and by annuities' often high fees, SunAmerica's earnings have grown at an average annual rate of 35% over the last five years. The company boasts that the 5,637% return on its stock between 1990 and 1997 made it the best performer on the NYSE in that period.
Broad, the billionaire visionary behind SunAmerica, is a high-profile Los Angeles philanthropist. He co-founded home builder Kaufman & Broad in 1957 before branching off to run SunAmerica when Kaufman & Broad spun off the financial unit in 1989.
SunAmerica recently had begun an international marketing effort but knew it would have taken years to build a credible overseas operation, Broad said.
By contrast, AIG is a global insurance company that derived half of its 1997 revenue outside the U.S. It is a major player in property-casualty insurance and life insurance, but has only a small annuity business.
AIG can supply SunAmerica with several things: access to a roster of blue-chip U.S. corporations that offer retirement products to their employees; an AAA credit rating that should lower SunAmerica's borrowing costs; and, most important, the ability to sell annuities in Japan and other Asian countries, where AIG has a dominant presence.
Those markets have historically been tough for foreign companies to crack. And though their economies are currently depressed, the region is extremely attractive to outsiders because of its high personal-savings rates and the limited access of the general public to broad-based investment products.
What's more, the financial problems of many foreign banks and governments have shaken public confidence and made individuals much more willing to rely on U.S. companies for investment needs, many experts say.
"This is a chance to create the premier global financial services company in the two fastest-growing markets, retirement services and international markets," Broad said.