Column: Roger's Soapbox

Astonishing Vagueries

By: | March 2, 2015

Roger Crombie is a United Kingdom-based columnist for Risk & Insurance®. He can be reached at [email protected]

There it was, in black and white. Perhaps the most astonishing statement I’d read in a decades-long analysis of how insurance works. The newspaper article began: “A $250 million payoff is on the table if the proposed $11 billion merger between Axis and PartnerRe fails to go ahead.” It continued: “Each firm will be liable to pay a break fee to the other if the deal … gets called off.”

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You’re going to tell me that it’s alright to use the word “get” (or more likely, in what passes for modern grammar, “your going to tell me its alright …”) but I digress — that’s not the point I’m making.

Think about the second sentence. It clearly states that if the deal between the two companies goes down the drain, each company will pay the other $250 million.

That can’t be right, I thought. What would be the point? If each company were to cut the other a check for $250 million, the one would cancel the other out, quite obviously.

Yet senior executives and bankers had put the deal together, and they usually know what they’re doing. Understanding the words became what Sherlock Holmes referred to as “a three-pipe problem.”

Eventually, I worked it out: It had to be a tax dodge. If the two checks were issued in high-tax jurisdictions, then banked in no-tax jurisdictions such as Bermuda, hefty net income all round.

To confirm it, I’d have to study both companies’ financials to see if they had taxed subsidiaries somewhere that earn $250 million of profit in a year, but then thought better of it.

I was reminded of the two economists who meet on the street. One holds a cat. “Buy this cat from me for $100 billion,” he said, “and then I’ll buy it back from you for $100 billion.”

“And what will we have then?” the second economist asked.

“A $200 billion economy,” the first replied.

I next considered the notion that most mergers destroy more value than they create. Perhaps these cross-payments might somehow increase the companies’ top lines and, therefore, their desirability to other potential partners. That didn’t cut it for me, so I stopped thinking and researched the matter.

Ultimately, the explanation was simplicity itself. An industry publication, considered in equal measure accurate and scurrilous, had run this sentence: “Axis and PartnerRe would be required to pay the opposite party a $250 million break fee if they decide to (cancel the merger agreement).” It’s badly worded, but you sort of know what it means.

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A reporter at the newspaper I had first read had picked up the story and rewritten it. The reporter, whom I know, has no business experience. His background is the crime beat. But his editor understands nothing of money, and only hires those who know less than he does, a classic strategy of weak managers.

The rewritten sentence should have read something like this: “If either Axis or PartnerRe were to call off their proposed merger, it would be required to pay the jilted party $250 million.”

I should have known that at the start, but when it’s in the newspaper, one tends to believe it. That way, of course (Risk & Insurance® excepted) lies madness.

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