The Manulife-Hancock Merger Start Of Something Big?

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After the announcement of Manulife Financial Corporations acquisition of John Hancock Financial Services, analysts differed over whether the deal represents the leading edge of an impending wave of life insurance company mergers and acquisitions.

On Sept. 29, the companies announced the deal, in which Manulife will pay about $11 billion in stock for Hancock. Their boards had unanimously approved the transaction the previous day.

Hancock stockholders must approve the deal. If completed, it would create a new corporate entity with a market value of almost $26 billion. It would be the second largest life insurance company in market capitalization in North America, after American International Group, Inc., New York.

Jason Zucker, an analyst with Fox-Pitt, Kelton Inc., New York, thinks the Manulife-Hancock merger probably does not presage a rash of M&A activity.

“Manulife was the most likely, willing and able large company with acquisition aspirations, while John Hancock was the most likely large acquisition candidate,” says Zucker. “As far as we know, no other multibillion dollar life companies have put themselves up for sale, and hostile deals are extremely unlikely.”

John Nigh, principal with Tillinghast-Towers Perrins New York office, thinks, however, the Manulife-Hancock deal could be the start of something big.

“Mergers and acquisitions have been down significantly for two or three years,” Nigh says. “Companies that have acquisitions as part of their overall growth strategy will eventually get back into it.”

Commenting on his companys planned merger, Hancocks CEO David DAlessandro says that consolidation in the U.S. life insurance industry is “inevitable” because smaller insurers like Hancock face a difficult challenge competing with larger insurers.

“This transaction gives us the scale, capital base and diversity of product and distribution to grow as a business,” he says.

Dominic DAlessandro, his counterpart at Manulife, says the acquisition would give his company access to Hancocks deep distribution network in the U.S., where Manulife currently has no agents of its own, plus entr?e into U.S. broker-dealer markets for variable annuities and mutual funds, where it also currently has no presence.

For Hancock, both executives point out, the union improves access not only to Canada but also to Asia, where Manulife has much wider distribution.

(Despite their shared last name, the two executives are not related.)

Analysts generally agree that, whatever the merger might portend generally for M&A in the industry, it makes sense for the two companies involved.

For one thing, Moodys Investors Service, New York, says, the new entity would allow considerable cost savings.

Andrew Kligerman, an analyst with UBS Investment Securities Inc., New York, agrees. “The combinations scale would likely produce more than $300 million in cost savings,” he says.

In a conference call with analysts, Manulifes Dominic DAlessandro projected savings of $350 million.

He estimated $100 million of that would come from Canadian operations, $110 million in the U.S., $15 million in Asia, $30 million from investment operations and the remainder from other functions.

Hancock estimates its own savings would be around $255 million.

But Zucker of Fox-Pitt calls Hancocks figure “a stretch,” pointing out that it would equal 41% of Hancocks 2002 general and administrative expenses of $618 million.

“The average cost savings for a deal are 25%,” says Zucker. “However, there are few businesses between these two companies that overlap.”

Regardless of where the costs are cut, a Hancock spokeswoman says they are not likely to take the form of broad layoffs at either firm.

“Management sees the merger as complementary, not overlapping, and expects growth prospects will ultimately limit a need for layoffs,” says the spokeswoman, Leslie Ujeda.

Tillinghasts Nigh also predicts few layoffs. Both companies can slash costs by more efficient use of technology, he says.

Another expected impact of the merger is that it would create a new powerhouse in annuity sales through the bank channel.

“The combined companies would have a particular expertise in selling both types of annuities [in banks],” says Kenneth Kehrer, head of Kenneth Kehrer Associates, Princeton, N.J.

In 2002, Manulife ranked 13th in variable annuity sales in the bank channel, while Hancock ranked fourth in selling fixed annuities in that channel, a study by Kehrer shows.

Manulife officials expect to close the transaction in the second quarter of 2004.

“If were lucky, we might actually close at the end of the first quarter,” said Manulifes DAlessandro in a conference call with analysts.

Taken together, the two companies net income totaled $1.4 billion last year. Of that, 67% came from their North American operations.

Manulifes market capitalization as of Sept. 24 was $14.7 billion, while Hancocks was $9.2 billion.

Hancock ranked eighth in U.S. individual life insurance sales last year, while Manulife ranked 16th. Combined, they would rank fourth.

Under the agreement, owners of Hancock common stock will receive 1.19 Manulife common shares for each Hancock share, equivalent to a price of $37.60.

Hancocks shares closed at $34.30 Sept. 24, the day rumors of the acquisition began to circulate.

At its initial public offering in 2000, when it converted from a mutual holding company, Hancock was valued at $17 per share.

Dominic DAlessandro will be president and CEO of the combined entity, which will be headquartered in Toronto.

David DAlessandro will remain as chairman and CEO of Hancock, directing the combined companies North American businesses out of Boston. After a year, he would become president of the combined firms.

Manulife says most of Hancocks senior management will remain.

Its U.S. subsidiary, Manulife USA, will become a Hancock unit. Hancocks Maritime Life Assurance subsidiary would become part of Manulifes Canadian operations.

The companies say both the John Hancock and Manulife brands will remain in effect in their current markets.


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 3, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.