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AIG to Buy SunAmerica : Insurance Giant Makes $16.5-Billion Deal for Annuity Marketer

TIMES STAFF WRITER

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.

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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.”

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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.

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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.

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“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.

Not surprisingly, many big U.S. companies, including AIG, Citicorp and Merrill Lynch, are moving to buy, or partner with, companies in Asian countries. The expansion drive has helped fuel a spate of huge financial mergers lately, such as the plan by Travelers Group to swallow Citicorp.

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Broad and Greenberg denied that the merger is intended to create a so-called financial supermarket, offering a variety of financial products.

That notion was popular in the 1980s but later became discredited when companies such as American Express failed to live up to expectations with it. Executives in recent mega-mergers all have backed away from portraying their combinations as financial supermarkets.

“I’m not talking about that at all,” Greenberg said of the idea.

Instead, the two companies hope simply to sell additional insurance products to their existing customers. For example, Greenberg said, someone buying an annuity from SunAmerica could also be sold an AIG car insurance policy.

AIG already has a presence in Southern California. It owns a majority stake in Woodland Hills-based insurer 20th Century Industries, and wholly owns International Lease Finance Corp., an aircraft leasing concern which, coincidentally, operates out of the penthouse suite of SunAmerica’s Century City headquarters tower.

Under the deal, Broad, 65, will continue to run SunAmerica. He said he has no plans to succeed the 73-year-old Greenberg at AIG.

Not surprisingly, some analysts wonder whether Broad--an independent thinker who has enjoyed phenomenal success in his business life--will chafe while working for the equally aggressive and demanding Greenberg.

“That’s ultimately the $64-million question--whether Hank Greenberg can delegate to Eli, because Eli has never worked for anyone else,” Chamberlain said. “That’s ultimately the deal maker or breaker.”

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Greenberg’s aggressiveness has been demonstrated in AIG’s relationship with 20th Century.

AIG stepped in with a capital infusion after the 1994 Northridge earthquake nearly ruined 20th Century, an auto and home insurer.

Until recently, AIG had taken a mostly hands-off approach to 20th Century, allowing the insurer to chart its own course with little interference, said William L. Mellick, 20th Century chief executive.

But earlier this summer AIG began exercising warrants and purchasing stock on the open market to boost its ownership to 53.01% as of Thursday.

On Aug. 10, AIG, which hold two appointed seats on 20th Century’s 10-member board, demanded that 20th Century call a special meeting Sept. 28 to replace the other directors and boost AIG’s presence.

“Hank Greenberg doesn’t often lose,” one analyst said. “I think he’s going to buy 20th Century and shove success down its throat.”

As for SunAmerica, its shareholders may well wonder if the firm would be a better investment on its own. Despite the premium AIG is offering, and AIG’s solid track record, it has been a slower-growing company with lower returns than SunAmerica.

What’s more, the property and casualty insurance business has historically been vulnerable to price wars and natural disasters.

Nevertheless, shareholders should give Broad, who has made “bushels of money for shareholders,” the benefit of the doubt, Chamberlain said. “This is the largest bet of Eli’s career,” she said. “I wouldn’t second-guess him.”

Times staff writer Liz Pulliam contributed to this report.

* WHAT’S NEXT FOR BROAD?: Billionaire SunAmerica chief has been L.A. civic leader. A1

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

New Financial Powerhouse

The planned merger of global insurance giant American International Group Inc. and retirement-savings specialist SunAmerica Inc. would create a company with about $36 billion in annual revenue and a broad insurance and investment product line for consumers and businesses. A look at the two companies:

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Hot Stocks

Shares of both SunAmerica and AIG have been spectacular performers in the 1990s, as the financial services industry in general has boomed. Year-end stock prices and latest on the New York Stock Exchange:

SunAmerica

Thursday: $71.38, +$7.13

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AIG

Thursday: $87.50, --$7.13

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Annuity Sales Soar

SunAmerica has become one of the country’s major sellers of annuity contracts--tax-deferred investment and insurance accounts aimed at aging baby boomers. SunAmerica’s annuity sales, in billions:

1997: $2.8 billion

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AIG

1997 revenue: $30.6 billion

1997 net income: $3.3 billion

1997 return on equity: 14.5%

Earnings growth, 1993-97: 77%

Operates in 130 countries

Product lines:

Property and casualty insurance

Individual and group life and health insurance

Risk-management services

Asset-management services

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SunAmerica

1997 revenue: $5.3 billion

1997 net income: $379 million

1997 return on equity: 21.2%

Earnings growth, 1993-97: 174%

Operates in United States only

Product lines:

Annuities/life insurance

Brokerage/financial planning

Mutual funds

Trust services

Sources: SunAmerica; Bloomberg News; Value Line Investment Survey

(Southland Edition) Name Game

Despite SunAmerica’s push to increase awareness of its name, some of its customers may know it by other names. What SunAmerica owns:

Insurance/annuities:

Anchor National Life

CalAmerica

First SunAmerica

John Alden Financial

SunAmerica Life

Polaris (brand)

Seasons (brand)

Sterling Select (brand)

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Broker-dealers:

Advantage Capital

FSC Securities

Royal Alliance

SunAmerica Securities

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Trust services

Resources Trust Co.

Source: SunAmerica


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