Shares in WTW rose by more than 8 percent today following initial reports of the bid in the media.
The acquisition of WTW could make Aon the largest broker in the world, pushing it above current number one Marsh & McLennan Cos. At least until MMC’s acquisition of JLT is completed.
Now Aon has officially announced its intentions as per Irish regulatory requirements, stating that any deal was “in the early stages” and would be made via an all-share business combination.
Aon also emphasised that the deal was still being evaluated and there “can be no certainty that any transaction will take place nor as to the form or terms on which any transaction might be pursued”.
Aon concluded its announcement with a caveat that further announcement will be made in due course, as appropriate, and said the information had been prepared in accordance with English and Irish law and Rule 2.4 of the Irish Takeover Rules.
One basic weird thing about the financial industry is that it consists of a lot of big pots of money that you can buy for less money than is in the pot. Occasionally there are stories about how a pharmaceutical or tech company is trading for below the value of its cash and marketable securities, and how weird and shocking that is, but it is absolutely the norm in the banking and insurance industries. JPMorgan Chase & Co. has a stock-market valuation of about $342 billion, but it has something like $600 billion of cash and cash-like investments and another $675 billion of trading assets and investment securities.1 American International Group has a stock-market valuation of about $37.6 billion, but it owns something like$240 billion of bonds.2 If you could buy all the stock of JPMorgan or AIG, you’d immediately control a much larger pool of money than you spent for the stock.
This is not a magical free lunch or a scam; it is just another way of saying that the financial industry, compared to more normal industries, tends to operate with a lot of leverage. Banks have a lot of money, much of it invested in relatively liquid financial assets, but most of that money is borrowed (from depositors, etc.) and will eventually have to be paid back. Insurance companies have a lot of money, much of it invested in relatively liquid financial assets, but most of that money comes from insurance policyholders and will eventually have to be paid back. The banks and insurance companies are just holding all that money in trust for someone else. That’s what a financial institution is; it’s a business that holds money for other people.
But the “pots of money that you can buy for less money than is in the pot” framework can be useful. For instance, if you need $100 million for some project, but you only have $10 million, you can go to a bank and ask to borrow the rest, but they will ask you tedious questions like “what is this for” and “how do we know you will pay us back.” But if you go find an insurance company with $10 million of equity value and $90 million of “float” (money from insurance premiums that will eventually need to be paid out in claims) that owns $100 million of bonds, you canbuythat company for $10 million, and now you’re in charge of a pot of $100 million. You control the company, you can make yourself the boss, you can sell the bonds for cash and invest the $100 million in your project.3 If your project is good, then you will pay back the insurance company’s investment with interest, and the value of your equity investment in the insurer will grow. If your project is bad, then you won’t be able to pay back the insurance company, you’ll lose your $10 million equity investment, and policyholders’ money will also be at risk. If your project is “I will buy a $100 million yacht and sail far away,” then the policyholders will lose everything, and you will have gotten a $100 million yacht for $10 million.
This is mostly not a magical free lunch or a scam, but not for some deep structural reason or anything. It’s just that this is all pretty well-known stuff, so a big focus of banking and insurance regulation is making sure that the people who control banks and insurers don’t just loot them for their own personal projects. But, you know, sometimes!
Here is aWall Street Journal storyabout Greg Lindberg, a Yale graduate who runs a group of businesses with the unfortunate name Eli Global, and who started buying insurance companies to fund his business:
Mr. Lindberg began scouring insurers for possible acquisitions in about 2012. What most seemed to attract him, former employees say, was the large cache of assets on insurers’ balance sheets.
Initially, he looked for small insurers that wouldn’t cost much, according to a deposition in later litigation over banking fees. His purchases eventually included a Louisiana insurer bought out of receivership and a struggling Dutch insurer acquired for €1.
Mr. Lindberg told regulators that investing in his own businesses was a safe strategy for the insurers because his company had achieved 35% annual investment returns. “Eli Global has a long history in establishing private placements and managing the risks successfully,” the company said in one presentation to regulators.
His first acquisition, in 2014, was a small Alabama burial-policy insurer, Southland National Insurance Corp. It had about $170 million of assets to cover future claims as policyholders died. Mr. Lindberg paid about $22 million for it.
And by now:
He bought nearly 100 companies around the globe, an estate in the Florida Keys, an Idaho lakeside retreat, a Gulfstream jet and the most expensive mansion ever sold in Raleigh, N.C. In September 2018 he added a 214-foot yacht with room for a dozen overnight guests. He also became the largest political donor in North Carolina and lavished money on other races around the country.
The cash came, at least in part, from huge sums Mr. Lindberg diverted from the group of life insurance firms he began assembling in 2014, a Wall Street Journal investigation found.
The Yale-educated executive lent at least $2 billion from those insurers to scores of entities he controlled, using much of it to expand his private holdings, according to interviews, regulatory filings and more than 4,500 internal documents from Mr. Lindberg’s companies reviewed by the Journal.
The sheer scale of Mr. Lindberg’s use of insurance assets to invest in his own businesses has little precedent in recent decades, industry experts say, and exposes hundreds of thousands of policyholders to an unusual and potentially risky strategy.
The story mentions a federal criminal investigation, and notes that Lindberg’s insurers have sometimes exceeded regulatory limits on related-party transactions, gotten approval to exceed those limits from state insurance commissioners whose election campaigns he supported, or used somewhat flimsy structuring to get around those rules. Lindberg’s spokesman says that he is cooperating with investigators and “aggressively working” to cut back on related-party transactions, and that the insurers are well-capitalized and, “to this point, there has never been a payment default” on the loans.
I don’t know! The point I want to make is that the good version of this is notthat different from the bad version, and it’s not always easy to tell which is which. “Guy buys insurance company and invests its float in his other business ideas” can describe a scam, but it can also describe Warren Buffett.4 There are important differences: Buffett doesn’t have any separate ownership interest in any of his businesses, and only makes money from those investments if his insurance conglomerate does; also, his insurance conglomerate does not lend him money to buy yachts or anything. But the basic idea of acquiring insurance companies because they are pots of cash that you can use to fund your investment ideas is an old and common and sometimes good one, and it’s almost the nature of the business.
Traditionally, the way Swiss banking worked is that if you were a wealthy person in the U.S. or France or Russia or wherever, and you didn’t want to pay taxes on your wealth, you could put it in a Swiss bank account and the tax authorities in your country would never be able to find it. (This ischanging.) This was a reasonably well-known thing in popular culture, and I assume it was even better-known among the financial advisers of rich people who didn’t want to pay taxes. So it’s reasonable to think that there was some inbound inquiry, a steady trickle of people flying into Zurich with suitcases full of cash and asking their cab drivers to take them to the nearest private bank.
But banking services are usually “sold, not bought,” as the saying goes, and that’s especially true of complex, structured, legally aggressive ones. Possibly stuffing your cash in a suitcase and flying it to Zurich is not actually the best way to evade taxes and open a Swiss bank account? This is the sort of thing that you’d want your Swiss banker to tell you before you show up on his doorstep. And so in practice there was also a steady trickle of Swiss bankers flying out of Zurich and hunting up clients in Dallas or Moscow or Paris.
There is a problem with this, though, which is that while for many years Switzerland more or less took the position that hiding money from foreign tax authorities was a natural right of every human being, the foreign tax authorities did not. Squirreling your money out of the U.S. or France or wherever to hide it in Switzerland and avoid taxation was illegal in those countries, and so the Swiss bankers who flew around the world to pitch it were, viewed in a certain light (that of the law), soliciting crimes. And sothere was a lot of this:
According to the judgment, the Swiss bankers found business by travelling through France using encrypted hard-drive and business cards without a logo. They were also given a “security risk governance” manual that provided guidelines about how to limit the risk of discovery while they moved about.
The manual told employees not to keep clients’ names on them, to get rid of sensitive data if needed or when crossing the border, to use different hotels to other UBS employees, and to be unpredictable in their movements, including which taxis they took and restaurants they ate in.
That’s from a Financial Times story about a 4.5 billion euro French court judgment against UBS Group AG for illegally soliciting French clients “at literal hunts in the French countryside, at top-end restaurants in central Paris, over games of golf, at the opera in Nantes and Lyon, rugby tournaments and in an €80,000 box overlooking the main court at Roland-Garros,” basically anywhere you might find wealth French people who dislike paying taxes and, perhaps, who enjoy play-acting at espionage?
(UBS is appealing, andstrongly protestedthe judgment, arguing that its bankers’ activities in France were legitimate meetings with existing clients or “simple marketing events” with no intent to solicit tax evasion. Wetalked a while backabout one UBS banker who testified that, sure, his bankers met with prospective clients on hunting outings, but these weren’t solicitations: “I have a hard time imagining signing a swaps contract between two rifle shots.”)
Let me ask you this question: Does this sound fun? How much money would you have to save in taxes to make it worthwhile for you to hang out with a UBS representative with a logo-less business card who communicates with you using dead drops, addresses you by a code name and is constantly changing taxis? One reasonable answer would be “quite a lot, because my time is valuable and this sounds like a lot of work, plus it makes me worry that I will end up in jail or getting my money stolen.” Ionce wrote, about similar methods that Credit Suisse AG used in dealing with U.S. tax-evasion clients, that my main takeaway was “just how tedious it would be to evade taxes” this way. But readingthisstory, I started to consider the opposite perspective. Surely some rich tax evaders are also bored. If you met a mysterious stranger at a hunting lodge, and he gave you his blank business card and told you to meet him in a cafe next week and make sure that you weren’t followed, wouldn’t you be tempted to see where it went? Maybe UBS wasn’t just selling tax evasion; it was also selling excitement.