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AXA MONY Case Solution

Solution Id Length Case Author Case Publisher
514 1671 Words (5 Pages) Andre F. Perold and Lucy White Harvard Business School : 208062
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AXA is the world’s largest insurance group that wants to acquire MONY, a life insurance company in US. The purpose of the acquisition for AXA is that MONYs operations in the US would complement the products and the geographical regions that AXA serves in the US. AXA offered $31 as the acquisition price per share to the MONY shareholders, which was the consensus of the analysts as the fair price for MONY too. The shareholders at MONY are skeptical as to the offered price and the manner in which the management & board has accepted the offer. AXA is financing the $1.5 billion merger through a debt offering to its own shareholders in which they have an option of converting their debts into shares once the deal emerges in time.

Following questions are answered in this case study solution:

  1. Why is AXA bidding for MONY? Does the deal make sense: (a) for AXA; (b) for MONY shareholders; (c) for management? AS a MONY shareholder, what concerns would you have about the deal?

  2. How did AXA finance the takeover bid? Explain the structure that they used. Why did they use this structure? What effects, if any, do you think this method of financing has on the likelihood of the deal succeeding?

  3. How would you price the ORAN at issue? Is it fairly priced? What does the price of the ORAN on February 9, 2003, imply about the probability of the deal succeeding? What is the fair price for MONY stock?

  4. Suppose that you hold a position in the ORAN on February 9. Would you want to buy or sell MONY stock (a) at the “fair” price calculated in question 3 above or (b) at the market price of $31.55? How do you explain the price of MONY stock on February 9?

  5. Suppose that you are the manager of a $2bn hedge fund with a significant stake in MONY and that on February 10 you receive a phone call asking to buy your stock at above the market price if you sign over the voting rights with the shares. What considerations would enter into you decision about whether to sell your MONY stock at $31.55 on February 9? 

AXA MONY Case Analysis

1. Why is AXA bidding for MONY? Does the deal make sense: (a) for AXA; (b) for MONY shareholders; (c) for management? AS a MONY shareholder, what concerns would you have about the deal?

The primary reason that MONY is bidding for MONY is the fact that it wants to take advantage of the sales agent network MONY has in the US. The addition of 1300 sales agents would be a 25 percent growth in the level of sales force for AXA, which would be very difficult to achieve otherwise. Also, the distribution systems and products offered by MONY were complementary to the distribution systems and range of products offered by AXA. Hence, at the very core, AXA is looking to take advantage of the setup of MONY in the US, which seems very logical financially. The deal would also be beneficial for MONY since it has been facing trouble with respect to earning profits. This was majorly attributed to the weak economy after the dot-com bubble burst, which harmed the sales for the insurance sector and also caused huge debt defaults in the technology and telecom sectors which the insurance companies hold in their portfolios mostly for covering the liabilities they expect from the policies they sell.

Even though MONY was on an upward trend in terms of profits, analysts still expected earnings per share to be 30-35 cents per share which was far less than the goal of 10% return on equity. The deal made sense for the management too. If the deal went through, the management would be receiving huge sums in Change in Control contracts, $90 million to be exact. The management was also of the opinion that MONY was too small to operate in a competitive industry that was in need of consolidation. The primary concern one would have as a shareholder for MONY would be that the acquisition price of $31 per share (the stock is currently trading at $31.5) could be less than the fair value. Another concern could be that rather than looking at the best interests of the shareholders the management is settling for a far lesser price for acquisition in order to quickly get the change in control remunerations. Also, the price represents only 70% on the dollar of MONY’s book value of $43 per share.

2. How did AXA finance the takeover bid? Explain the structure that they used. Why did they use this structure? What effects, if any, do you think this method of financing has on the likelihood of the deal succeeding?

AXA issued ORANs to fund the cash offer. This was a debt security with the payoff being dependent on whether or not the deal for MONY materializes on time. If the deal wasn’t completed on 22nd of December 2004, then the ORANs would pay off their nominal face value plus interest at Euribor. On the other hand if the deal was to go through on time then each ORAN unit would be converted into one share of AXA. These ORANs were not issued publicly but were offered as a rights issue to the current shareholders of AXA. Each share of AXA entitled the shareholder to one warrant, with 16 warrants entitling the holder to purchase one ORAN. The reason for AXA to only offer the right to their existing shareholders was that they didn’t want to raise new equity for balance sheet reasons. Also, the poor performance of the equity markets at that time had left many issuers undercapitalized, and in turn forced them to issue equity for regulatory reasons. If the likelihood of the deal succeeding increases than that would increase the price of the ORAN since, when the deal goes through, the holders of ORAN would be able to convert their issues into shares and hence be able to trade those shares at the prevailing share price.

3. How would you price the ORAN at issue? Is it fairly priced? What does the price of the ORAN on February 9, 2003, imply about the probability of the deal succeeding? What is the fair price for MONY stock?

At issue, the ORAN should be priced in the following way:

ORAN Price = Pay off + (Current Share Price – Pay-off) * (Probability of Merger)

This formula essentially conveys that the holders of the ORAN would be entitled to the minimum payoff of Eur 12.75 which is the face value of the debt issue. Since, the share price of the AXA stock at the issuance of the ORANs is 16.37, it is only fair that the difference of the share price to the face value be multiplied with the probability of the merger and added to the face value of the ORAN. This would fairly price the ORAN. Accordingly, the ORAN is not fairly priced at issuance. The price of Eur 12.75 depicts a zero percent probability of the deal coming through. It should take into account the probability of the deal going through. The price of the ORAN on Feb 9th 2003 is Eur 16.6 and the share price of AXA on that date is Eur 18.41. According to the formula above, what this depicts is that, the market believes that there is a 68 percent chance of the deal going through. On the other hand, the MONY stock is trading at $31.55. The offered price by AXA for MONY is $31. Hence, if the market believes that there is a hundred percent probability that the deal would go through then the MONY share should be priced at $31. Also, the financial advisors of MONY, the CSFB, considered $31 per share as the fair price for MONY.

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