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Spiked sake bomb

21 December 2011 By Rob Cox

Somebody slipped the executives of Tokio Marine Holdings a Mickey Finn on their last trip to Delaware. That’s one explanation for the Japanese insurer’s Godzilla-sized payment for Delphi Financial. Tokio’s $2.7 billion purchase comes at a near 80 percent premium to what normal investors were willing to pay for the U.S. insurer. It looks like another example of Japan Inc throwing shareholders under the bus in the name of international expansion.

It is easy to understand the mentality of Japanese companies, given the challenges of their home market. As the country’s population shrinks by a net one million people a year for the next two decades, expanding abroad must feel like a do-or-die proposition. That’s got to be doubly true for anyone, like Tokio Marine, active in the life insurance business. And with a strong yen to boot, it might even feel like a smart case of market timing.

But the price is often far greater in financial terms than the rewards on offer. More importantly, by splashing out overseas, many Japanese groups are waiving a golden opportunity to consolidate at home, which would make them stronger global competitors and reap benefits for their shareholders. That’s been the case for this year’s crop of Japanese shoppers: Takeda Pharmaceutical, Toshiba, Kirin and now Tokio Marine.

Indeed, Tokio Marine makes much of the fact that Delphi will diversify its international earnings to around 46 percent of the total. That’s fine, absent the valuation: It’s paying 73 percent above Delphi’s Tuesday close. Fold in the $1 a share dividend it says it will pay to Delphi shareholders and the premium is around 76 percent. That’s 1.5 times book value for a stock that traded below assets-minus-liabilities one day ago.

Tokio’s announcement is devoid of any reference to synergies or cost savings. It did acquire Philadelphia Consolidated Holding for $4.7 billion three years ago. Crunching the two together may create efficiencies. But they won’t be enough to cover the premium it’s offering – which, coincidentally, is the same as the one it paid for Philadelphia Consolidated. Delphi’s owners sure knew how to mix this M&A cocktail for Tokio.


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