Lessons of Claiming a 'Merger of Equals' (TRH, AWH, BRK-A)

Transatlantic Holdings Inc. (NYSE: TRH) and Allied World Assurance Company Holdings Ltd. (NYSE: AWH) are getting to see the gains and pains of what exactly a “merger of equals” translates to.  These two companies have effectively called this a merger of equals as the two will combine in specialty insurance and reinsurance operations.  Investors know that both fields can hive big hits when things go their way, but specialty insurance and reinsurance can have a big bite when damages exceed actuarial risks.  In one sense, you could argue that the combined company will just be more like Berkshire Hathaway Inc. (NYSE: BRK-A) in its insurance and reinsurance operations.  In another sense, Mr. Buffett’s conglomerate is quite different because it has many areas that act cyclical in nature.

The merger of Transatlantic and Allied will give rise to an entity with $21 billion in assets, almost $7 billion in shareholder equity, and total capital of $8.5 billion.  The transaction has been approved unanimously by the boards of directors of both companies.  Upon its completion,  Transatlantic shareholders will own 58% of the newly created holding company while Allied World’s stockholders will own 42%.  For some reason that doesn’t quite exactly look and act like a merger of equals.

Advocates for the transaction cite the following anticipated benefits:

• Increased financial strength, a stronger capital base and greater business diversification;
• Access to added growth opportunities with greater diversity, enhanced structural flexibility and improved earnings stability;
• A more complete suite of products and services; and,
• An expanded distribution and a global platform.

Goldman, Sachs & Co. and Moelis & Co. LLC acted as financial advisor to Transatlantic while
Deutsche Bank Securities Inc. acted as financial advisor to Allied World.  We have also seen at least one law firm release an “investigation of the merger” that is now becoming the cookie-cutter press release around just about every merger out there.  Some of those become class action suits and some never go beyond the basic investigations.

Allied World Assurance Company Holdings Ltd. (NYSE: AWH) is down 2.8% at $56.46 and Transatlantic Holdings Inc. (NYSE: TRH) is up about 11.4% at $49.02 after about 90 minutes of trading.  If you look at the reaction on each, you might question whether or not these global players in reinsurance and specialty insurance can really pass this off as a merger of equals.