In the popular television series Suits, Harvey Specter plays the role of a well-honed corporate attorney who, from time to time, carries out mergers and acquisitions (M&A) with aplomb.
Although these portrayals of M&A transactions are somewhat romanticised for the benefit of the viewer, mergers and acquisitions are an important part of the economic cycle in free market environments.
Bermuda's re/insurance market is no exception and M&A deals involving Bermuda re-insurers are being struck with increasing frequency.
The current $4.2bn XL offer for Catlin, the proposed merger of PartnerRe and Axis (combined market capitalisation of $11bn), and the 2013 Markel Corporation acquisition of Alterra for approximately $3.1bn are examples of significant Bermuda M&A deals in recent times.
This consolidation has been made possible by the softening market environment brought about by a lack of insured losses, and a substantial influx of third party capital flowing into the re/insurance market.
The combination of softening and overcapacity has made/can render traditional re/insurance business less profitable, and in turn makes some companies (targets) more affordable. The softening rates also push companies to diversify in search of previously untapped revenue and a rapid way of doing this is through M&A.
The influx in third party investment has increasingly been in the form of catastrophe bonds and insurance linked securities (ILS). According to www.artemis.bm, the ILS market expanded by $8.8bn in 2014 and now exceeds $25bn. Non-traditional re/insurance capital market sources are now estimated to total in excess of $50bn.
The spate of M&A activity in the Bermuda re/insurance market has provided for interesting comparison.
In the eight deals analysed for the purposes of this article, two trends became apparent. The first and most obvious is that offers on targets typically include a mixture of cash and some shares in the bidder or an option of cash or shares, though the proportion varies from deal to deal. By way of example, and according to PR Newswire on January 9, Catlin shareholders are expected to receive $5.85 (388 pence) in cash and 0.130 shares of XL for each Catlin common share.
Other common routes are a strictly cash for stock offer or a strictly stock for stock offer (where the bidder only offers the target a certain number of its shares).
The second notable trend arises with respect to the price/consideration paid for the target. One of the metrics for looking at price/consideration is the premium paid relative to the bid or share price of the target immediately prior to the offer (bid/premium ratio).
Converted into a percentage, the average bid/premium spread is approximately 24 per cent with respect to the deals analysed, while the range was from 16 per cent to 33 per cent. So in plain terms, a typical bidder is willing to pay 24 per cent more than the market price to acquire a given target. This suggests that the related efficiencies of consolidation are substantial.
Mergers and acquisitions of Bermuda companies are typically carried out by amalgamating or merging companies.
Amalgamations pursuant to the Companies Act 1981, as amended (the Act), take place when two or more companies amalgamate and continue as one company. The property of each amalgamating company becomes the property of the amalgamated company vesting automatically. The amalgamated company then becomes liable for the obligations of each amalgamating company. As such, no "new" company is created, and no "old" company is extinguished.
In practice, the bidder typically incorporates a new subsidiary in the form of a Bermuda exempted company that subsequently amalgamates with the target company. The consideration for such an acquisition is cash, shares in the bidder or a combination of both.
Mergers under the Act can take place between two or more companies, but unlike amalgamations, one of the merging companies must be selected as the surviving company. The surviving company absorbs the other entities, which then cease to exist. Like an amalgamation, the assets of the merging companies vest in the surviving company, which will carry on the business of the merging companies while remaining liable for the obligations of each.
As with amalgamations, a subsidiary company is typically formed, but this company then becomes the surviving company after merging with the target.
Under the Act, it is also possible to use a court sanctioned scheme of arrangement for a similar purpose. A scheme involves an application to the Bermuda Supreme Court to convene a meeting to vote on the scheme. The company would then hold the meeting of the shareholders, and if approved by a majority, the Court then subsequently sanctions the scheme.
In the context of an acquisition or takeover, typically the scheme involves shareholder approval to either transfer shares of the target entity to the bidder or the cancellation of the share capital of the target. In consideration for the transfer or cancellation, the bidder transfers to target shareholders either cash consideration or new shares in the bidder or a combination thereof.
The various stakeholders in the re/insurance market will surely be paying close attention to M&A activity going forward, while the deals to date will provide relevant pricing and market context for both the bidder and target. As for the effect on the Bermuda market as a whole, time will tell.
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