Billionaire investor Carl Icahn may have sent
AIG's value rocketing with calls to split the insurance behemoth up, but there are questions over whether a breakup would deliver the result he wants. And just how much that breakup could cost.
That said, the company is understood to be mulling the sale of its small mortgage-insurance business and it has been reported that Morgan Stanley has been drafted in to look over the options after this new shareholder push. According to the Wall Street Journal, Morgan Stanley’s fees alone could reach $250 million. Last time the break-up question arose, in 2009, the WSJ estimated total fees would be US$1 billion.
Nothing is likely to be confirmed before November 3 however, as that is when AIG will release its third quarter earnings. Peter Hancock, AIG president and CEO, responded to Icahn, saying: “We have taken important and significant steps to reposition AIG by both simplifying and de-risking the company, and realizing attractive valuations from non-core asset sales. We look forward to sharing our progress and strategies at our regularly scheduled earnings call.”
Earlier this week, Icahn said AIG is “too big to succeed” in an open letter to CEO Hancock, calling for a break up of its business into separate P&C, life and mortgage insurers.
Icahn, who has earned such titles as “corporate raider”, “rebel shareholder”, and “shareholder activist”, is well versed in courting the media to get his way. He was instrumental in Motorola's breakup in 2008, making good use of open letters and full page adverts in the
Wall Street Journal.
The proposal received a warm welcome, sending AIG's shares up 5% from US$60.90 at closing on Tuesday to US$63.90 at close on Wednesday. Icahn himself has taken a “large stake” in AIG.
In his letter Icahn name-checked fellow shareholder activist, John Paulson, who has made similar calls and said a breakup of AIG is “overdue”. The intention of such a move is to shrug off the company's status as a "systemically important financial institution (SIFI)", a label designated by the Financial Stability Oversight Council, which subjects it to enhanced supervision, and according to Paulson and Icahn, smothers the company's performance.
Indeed, it is thought a breakup proposal has been on the table in AIG’s boardroom for some time, but the board does not believe the benefits outweigh the negatives.
In his chairman's message in 2011, after the government bailout of AIG, Robert Miller acknowledged that AIG leadership was steering the company to its breakup “Under the theory that selling off the company’s assets was the best way to generate the funds to repay American taxpayers... Unfortunately, these efforts would have fallen far short of repaying our obligations to the taxpayers,” he said.
“Eventually, with the US Department of the Treasury and the Federal Reserve convinced that the breakup of AIG wasn’t necessary, the complete recapitalisation of the US government investment was put in motion.”
Well now that conviction has been called into question once again. Such a breakup will not be an easy job by any stretch, with the way the company is structured potentially leading to complications for brokers dealing with AIG. It remains to be seen whether next week's revelations will deliver answers or more questions.
