On Hostile Takeovers

John Charman, orchestrating Endurance’s takeover bid of Aspen (www.endurance.bm)

Punctuated only by the news of increasingly desperate efforts to find a missing plane in the Indian Ocean, the market awoke from a soporific start to 2014 on 14 April when Endurance launched their $3.2 billion bid to acquire fellow Bermudian based specialty insurer Aspen. In addressing their offer directly to Aspen’s shareholders without the support of the company’s board of directors, Endurance set the scene for an increasingly bitter exchange of words between the two firms that have grabbed the headlines since. That the deal was orchestrated by Endurance’s CEO John Charman, one of the industry giants of the last few decades but no stranger to controversy, has added further spice to what has already become a very rowdy affair.

Hostile takeover bids are comparatively rare and according to the Financial Times the number has fallen to a decade-low, representing under 5% of all M&A activity. The majority of them also fail. The two sectors in more recent years where aggressive acquisition tactics have found a home are in mining and pharmaceuticals. Where the target’s value substantially comprises its mineral extraction rights or drug licenses and patents then one might argue that the means of acquiring these assets can justify the ends: in other words it does not matter especially how friendly the approach is.

Of course insurance is a different story and particularly so at the specialist end of the industry. The evolution of risk modelling has lowered barriers to entry. The value of a brand in attracting and retaining business flows has also diminished. More than ever insurance is a “people business” and even in large companies like Aspen, the firm’s profitability is dependent on the skills and capabilities of a relatively small cadre of senior employees who are highly mobile. The risk of losing the on-going loyalty of the target company team is the principal reason why we have seen so few successful hostile takeovers in the insurance industry. The battle for the hearts and minds of Aspen’s underwriters is as important as it is to persuade the company’s shareholders of the financial merits of the offer on the table. The most deadly poison pill of all to swallow would be to end up owning a company stripped of its key underwriting talent: a point Endurance are sure to be cognizant of as the rhetoric escalates.