American International Group (AIG) has nominated activist investor John Paulson for its Board of Directors and expanded its Board from 14 seats to 16 seats – also agreeing to add Carl Icahn nominee. However, this decision is working against long-term AIG shareholders.
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AIG reported an after-tax operating loss of $1.3 billion earlier this month for the fourth quarter of 2015. Comparatively, AIG recorded after-tax operating income of $1.4 billion in the prior-year quarter.
Now, Peter Hancock, AIG’s CEO, points out that his company is in the midst of a “three-year plan to transform AIG.” The multinational insurance company is getting more and more pressure from one of its biggest shareholders – activist investor Carl Icahn – who’s said that AIG needs to split into three public companies, which would help it “to shrink below the threshold for systemically important financial institutions.”
Icahn is still having conversations with AIG’s Board, but together, there has been limited progress toward getting the company to break up. One of the telling statements from Icahn includes:
“In all of our discussions with Mr. Hancock it was abundantly clear to us that he is not willing to take the bold steps that we, and so many other shareholders, believe are long overdue. In addition, in those conversations he failed to lay out any alternative strategic plan with the potential to unlock value for shareholders or to provide compelling reasons as to why these businesses belong together.”
The potential addition of Paulson to AIG’s Board, as well as one of Icahn’s managing directors, however, provides an interesting development for AIG’s shareholders, to say the least.
The nominations show that AIG is looking to add a new voice to its Board, one that ultimately may help the company transform its operations and boost shareholder value. Paulson’s nomination, seemingly, gives Icahn yet another ally who supports the break-up of AIG. Although Paulson isn’t just focused on breaking up the company into three parts, he also thinks that value can be unlocked by breaking up the company and selling various assets – where he sees shares worth $75 in that case.
Now, that’s not to say we want see a big breakup (into three companies) as that’s where the mostupside lies. Paulson has noted before that AIG could trade at over $100 per share if it were to do this three-way separation. “AIG is frankly overdue in following in the footsteps of all other major multi-lines in breaking up Life and P&C into separate companies,” Paulson said. I tend to agree with notion, but admit this is no easy task – especially with AIG CEO Hancock pushing back.
The Uphill Battle, Seemingly
But AIG may need to undergo significant changes beyond the possible addition of Paulson and Icahn to its Board if it hopes to bolster its per-share price in the short-term.
AIG’s Board last month launched nine “modular” business units, each with its own specific financial metrics. It also announced plans to create a “legacy” portfolio to hold non-strategic assets, and both moves could provide long-lasting value for AIG’s shareholders.
With these steps, AIG is seemingly taking a major step to simplify its business – a more leaner, more profitable insure. But the key to this alone does little to really unlock shareholder value. However, the silver lining here is that with these now nine separate businesses it could make them easier to be spin off or sold.
AIG appears to be acknowledging that there’s a possibility of breaking up its business, a move that appears even closer with the recent Board moves. Now, Icahn having a seat at the AIG Board could mean we’re closer to a big breakup, I don’t think that’s the case. Paulson is also on the board and as noted, he’s walked back his support for the breaking up of AIG into three companies – saying he’s willing to settle for a spinoff and asset sale approach.
This is something that AIG appears to be quietly moving toward with the recent moves to create nine separate units. And by adding Paulson to the board, in addition to Icahn’s managing director, it’s my thinking that AIG is hoping Paulson can keep Icahn’s ambitious in check. Nonetheless, Paulson has said before that a simple asset sale and various spinoffs would get shares to $75 – upside of 50% from here.