Sweeter PR not enough to revitalize M&A deal

August 1, 2011

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

NEW YORK — Can public relations alone rescue a crummy deal? By taking the uncommon tactic of switching flacks in the heat of battle, that’s sort of what U.S. reinsurer Validus Holdings is attempting with its hostile bid for $3.2 billion rival Transatlantic Holdings. Validus shareholders have so far scorned the idea. The trouble is, messaging doesn’t win deals, numbers do. On that score, Validus isn’t far enough ahead.

The deal seems a pretty standard M&A game. In June, Allied World Assurance inked a so-called merger of equals worth around $7 billion with Transatlantic — both firms being, originally, spin-offs from American International Group. Then, in July, Validus tried to break up the deal by offering more stock and cash for Transatlantic than Allied World had in mind.

Since then, there has been lots of noise from both sides. But investors don’t seem to like either offer very much, and they have bid up the target’s stock accordingly. As the war of the words escalated, Validus decided it needed new mouthpieces. It sacked public relations firm Sard Verbinnen in favor of Brunswick Group late last week, and came out freshly shouting on Monday about the merits of its offer.

It’s easy to see why Validus, led by Chief Executive Ed Noonan, wanted to ratchet up the rhetoric. Despite its offer being worth around 4 percent more than Allied World’s, the board of Transatlantic is refusing to engage in a discussion without tying Validus’s hands with a standstill agreement — hardly the obvious way to maximize value for Transatlantic’s shareholders.

But Validus also needs to repair relations with its own shareholder base. Since unveiling its bid, its stock has plunged 14 percent. Allied World saw its shares slide, too, but only by half as much. Transatlantic is now trading at a premium to both offers.

The winner will presumably be the suitor that raises its offer the most. Both buyers are, however, constrained by their inability to convince their owners. Though Validus’s offer ought to have the edge with Transatlantic’s investors, it has a problem with its own. Telling a better story might help at the margin. But it will take more than PR to change the numbers on a deal that isn’t adding up for its shareholders.

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