Thursday, February 17, 2005
Observations on MetLife/Travelers and other mergers
LOOKING AHEAD by Wally Dobelis
Some significant business mergers of past weeks seem to confirm that the corporate world continues to move toward more consolidation and specialization, with some progress in improving the huge US balance of trade deficit. One of mergers involves our 23rd Street neighbor, Metropolitan Life Insurance Company, a major local employer.
The Met, second largest US life insurance provider, is acquiring another insurer, Travelers, a major component of Citigroup, for $11.5B, at a 13.5 P/E ratio. It is a good buy, if one understands life insurance dynamics. Citigroup claims that they want to concentrate on credit cards, non-retail banking and their Smith-Barney brokerage subsidiary, and insurance moves too slowly. The Met’s return on equity (ROE) is 11% compared to Citicorp’s 19%. On the other hand, Met’s earnings growth actually has been 22% since the 1999 demutualization, compared to Citicorp’s 14%. This from the Economist, who also notes that the insurer’s book value, has gone up, holding down the ROE. I would state it differently – new business requires outflow in excess of first year’s premiums that is recaptured over the lifetime of the policy.
It is ironic that Citigroup was formed in 1998 by Travelers purchasing Citibank. Sanford Weil, the insurance man behind the Citigroup merger, must have had an epiphany; he sold Travelers casualty and liability companies in 2002. Anyway, it is good news for the essential life insurance industry, an original social benefactor and protector of widows and orphans that has also turned into a provider of retirement funds, employee benefits and means for estate preservation. Assuming prudent investment of the reserves, a legal requirement enforced by state laws, and with death benefits protected against federal income taxation, ordinary life insurance is a major vehicle for inter-generational transfer of funds. The insurance industry and the public will gain from the merger. Citicorp can concentrate in banking and security marketing, eliminating the conflict of interests between investment banking and insurance/annuity sales. The insurers will continue consolidating, and help defray the US trade deficit, as the Met does, by spreading employee benefit plans abroad, to such new industrial countries as China, India, Mexico, South Korea and Taiwan.
Another important consolidation is Proctor & Gamble’s buying of Gillette Company, for $57B. A lethargic company producing traditional consumer goods is acquiring a more dynamic younger companion that has progressed from musty razors to high-tech shavers (Mach3), batteries (Duracell), toothbrushes (OralB, Braun) and has had a 75% market rise. The old-timer P&G, with $51B in sales (Tide, Always, Iams, Charmin, Bounty, Actionel, Crest, Ariel, Downy, Pampers, Folgers, Wella, Olay, Head&Shoulders) wants to consolidate and expand, particularly in China, the fastest growing consumer market. It is ironic that the Chinese are now the industrial giants, and we have dropped to contending for their consumer goods market; but, anything to cure the US trade deficit... The P&G people, who have established a solid brand name in China, continue liquidating their losers, so far eliminating Sunny Delight, Jif Peanuts, Crisco and four detergents, including the well-respected Oxydol.
A strong reason for P&G’s need for partners is self-protection against Wal-Mart’s overwhelming ability to dictate their supplier prices, with the threat of cutting out the producer by creating a store brand. It is a major threat, when Wal-Mart consumes 25% of P&G’s production while P&G constitutes only 10% of their total sales. The producers’ response is to shed the weaklings and promote the strongest brand-name products that the predator cannot successfully imitate. It is war, make no mistake, and P&G has become the world’s largest advertiser.
A current example of Wal-Mart’s power is the oncoming collapse of Winn-Dixie supermarkets, squeezed between Publix markets and the Bentonville behemoth. It may not be apparent how much of the US trade deficit, 6% of its GDP, is due to Wal-Mart’s buying the bulk of their goods offshore. Wal-Mart destroys the livelihood of American factory workers, and our children will have to pay off the debts of this cheap-goods-drunk non-saver generation. And if the Chinese and Japanese stop investing their trade surpluses in US Treasuries, there emerges the threat of a collapsing US investment market. Meanwhile the Wal-Mart behemoth is closing a store in Canada that is near to getting unionized, as a warning shot that such activities will not be tolerated – although the company insists its action is prompted by lack of profitability, not union busting.
So, while a few companies are trying to recapture US markets overseas, Wal-Mart’s outsourcing will countermand much of such effort. Anti-trust action may not be suitable against them, there are imitators who mirror the market actions, Target, and the new confederation of the weak, Kmart and Sears. Anyway, anti-trust does not work in the long run. The breakup of the AT&T monopoly into a parent and seven Baby-Bells in 1984 and the Deregulation Act of 1996 have resulted in the B-Bs recombining into four major companies, and one of them, SBC, will now kindly absorb the moribund former long-distance giant, for $16B. For some more great deregulation effects we can look at the current airlines’ bankruptcies and the California electric power/Enron story, all essential industries going into that good night. Less government, yeah, that’s what we need, for sure.
Wally Dobelis thanks the NY Times and Economist for facts.
Some significant business mergers of past weeks seem to confirm that the corporate world continues to move toward more consolidation and specialization, with some progress in improving the huge US balance of trade deficit. One of mergers involves our 23rd Street neighbor, Metropolitan Life Insurance Company, a major local employer.
The Met, second largest US life insurance provider, is acquiring another insurer, Travelers, a major component of Citigroup, for $11.5B, at a 13.5 P/E ratio. It is a good buy, if one understands life insurance dynamics. Citigroup claims that they want to concentrate on credit cards, non-retail banking and their Smith-Barney brokerage subsidiary, and insurance moves too slowly. The Met’s return on equity (ROE) is 11% compared to Citicorp’s 19%. On the other hand, Met’s earnings growth actually has been 22% since the 1999 demutualization, compared to Citicorp’s 14%. This from the Economist, who also notes that the insurer’s book value, has gone up, holding down the ROE. I would state it differently – new business requires outflow in excess of first year’s premiums that is recaptured over the lifetime of the policy.
It is ironic that Citigroup was formed in 1998 by Travelers purchasing Citibank. Sanford Weil, the insurance man behind the Citigroup merger, must have had an epiphany; he sold Travelers casualty and liability companies in 2002. Anyway, it is good news for the essential life insurance industry, an original social benefactor and protector of widows and orphans that has also turned into a provider of retirement funds, employee benefits and means for estate preservation. Assuming prudent investment of the reserves, a legal requirement enforced by state laws, and with death benefits protected against federal income taxation, ordinary life insurance is a major vehicle for inter-generational transfer of funds. The insurance industry and the public will gain from the merger. Citicorp can concentrate in banking and security marketing, eliminating the conflict of interests between investment banking and insurance/annuity sales. The insurers will continue consolidating, and help defray the US trade deficit, as the Met does, by spreading employee benefit plans abroad, to such new industrial countries as China, India, Mexico, South Korea and Taiwan.
Another important consolidation is Proctor & Gamble’s buying of Gillette Company, for $57B. A lethargic company producing traditional consumer goods is acquiring a more dynamic younger companion that has progressed from musty razors to high-tech shavers (Mach3), batteries (Duracell), toothbrushes (OralB, Braun) and has had a 75% market rise. The old-timer P&G, with $51B in sales (Tide, Always, Iams, Charmin, Bounty, Actionel, Crest, Ariel, Downy, Pampers, Folgers, Wella, Olay, Head&Shoulders) wants to consolidate and expand, particularly in China, the fastest growing consumer market. It is ironic that the Chinese are now the industrial giants, and we have dropped to contending for their consumer goods market; but, anything to cure the US trade deficit... The P&G people, who have established a solid brand name in China, continue liquidating their losers, so far eliminating Sunny Delight, Jif Peanuts, Crisco and four detergents, including the well-respected Oxydol.
A strong reason for P&G’s need for partners is self-protection against Wal-Mart’s overwhelming ability to dictate their supplier prices, with the threat of cutting out the producer by creating a store brand. It is a major threat, when Wal-Mart consumes 25% of P&G’s production while P&G constitutes only 10% of their total sales. The producers’ response is to shed the weaklings and promote the strongest brand-name products that the predator cannot successfully imitate. It is war, make no mistake, and P&G has become the world’s largest advertiser.
A current example of Wal-Mart’s power is the oncoming collapse of Winn-Dixie supermarkets, squeezed between Publix markets and the Bentonville behemoth. It may not be apparent how much of the US trade deficit, 6% of its GDP, is due to Wal-Mart’s buying the bulk of their goods offshore. Wal-Mart destroys the livelihood of American factory workers, and our children will have to pay off the debts of this cheap-goods-drunk non-saver generation. And if the Chinese and Japanese stop investing their trade surpluses in US Treasuries, there emerges the threat of a collapsing US investment market. Meanwhile the Wal-Mart behemoth is closing a store in Canada that is near to getting unionized, as a warning shot that such activities will not be tolerated – although the company insists its action is prompted by lack of profitability, not union busting.
So, while a few companies are trying to recapture US markets overseas, Wal-Mart’s outsourcing will countermand much of such effort. Anti-trust action may not be suitable against them, there are imitators who mirror the market actions, Target, and the new confederation of the weak, Kmart and Sears. Anyway, anti-trust does not work in the long run. The breakup of the AT&T monopoly into a parent and seven Baby-Bells in 1984 and the Deregulation Act of 1996 have resulted in the B-Bs recombining into four major companies, and one of them, SBC, will now kindly absorb the moribund former long-distance giant, for $16B. For some more great deregulation effects we can look at the current airlines’ bankruptcies and the California electric power/Enron story, all essential industries going into that good night. Less government, yeah, that’s what we need, for sure.
Wally Dobelis thanks the NY Times and Economist for facts.
# posted by Wally Dobelis @ 5:07 AM 
