The MONY Group
In October of 2003, we became intrigued by the proposed acquisition of the MONY Group by AXA Financial at a significant discount to book value. MONY was a business that we had previously valued and thought had potential. Its strengths were an excellent, not easily duplicated broker network and a large closed book of business. MONY was once a substantial player in the middle-market life insurance business, but it had been run into the ground by a group of inept and self-serving managers. We initially passed on investing in the business because of this management problem. Management was a product of the de-mutualization of MONY, and no one could acquire more than 5% of the outstanding stock for 5 years. That deadline was set to elapse last fall, and several savvy investment groups bought shares right up against that 5% threshold. Management knew that they were going to be fired as soon as some group could take effective control, so they negotiated a no-bid sweetheart deal with AXA. MONY would be acquired by AXA for a significant discount to book value ($31/share vs. a book value of $42/share) and management would receive huge guaranteed severance packages in return. In addition, a punitive breakup fee was allowed to AXA in the event that MONY’s management lost control of the company so that it would be financially painful for new management to back out of the deal.
Why were we interested? In the MONY case, shares had already traded through the deal price (above $41/share) indicating that investors believed that the new shareholders would be able to kill the deal or negotiate a better one. Our internal analysis figured about a 25% probability of a bad outcome (MONY management completing the deal) and a 75% probability of a good outcome (AXA raising its bid, a new bidder emerging, or shareholders killing the deal and bringing in shareholder-oriented and value-creating managers). The downside was $31.30/share, and the upside was about $42+/share. We participated, but we failed to receive the outcome that we and other long-term investors wanted. Shareholders were lined up to vote the deal down, but MONY’s management used some skillful legal wrangling and even shareholder money to force the deal through. So MONY sold to AXA for $31/share plus a special dividend. Since our purchase price was so close to the deal price, however, we lost only about 0.2% on the whole transaction, including commissions. We include this discussion to provide some color on alternate strategies we employ when the market is not giving us good prices on the businesses we wish to buy.