Shares in Friends Life (LSE: FLG) leapt for joy when it emerged that fellow insurer Aviva (LSE: AV) (NYSE: AV.US) was eyeing it as a takeover target.
They jumped 5%, but Avivas stock fell by a similar amount. Investing is one of those rare areas where it is better to be the hunted, rather than the hunter.
As an Aviva shareholder, Id be happy if it gave up the chase. Am I right to be concerned?
Where Theres Life
Chief executive Mark Wilson and chairman John MacFarlane have worked hard to restore the investment case for Aviva since 2012, focusing on generating cash and boosting its troubled balance sheet. I hope they dont blow it now.
Investors have seen the benefits, with the share price of 47% on two years ago. Growth has slowed in the last six months, andI now see Aviva as a strong hold rather than an urgent buy, especially given itsreduced 2.94% yield.
But as the global population ages and state pensions become unaffordable, I want long-term exposure to the life and pensions sector.
Aviva Fever
The mergerwould create the UKs leading insurance and savings business with 16 million customers, a stronger and more diversified group with a wider product range.
I can see why Aviva is tempted. It would subsume Friends Lifes assets under management, double its corporate pensions book and massively increase its protection business.
Better still, the new group should yield around 4.8%. Although that wont please Friends Life investors, who currently get around6%.
Dash For Crash
We live in challenging times, and making massive acquisitions like this only adds to the risk, at a time when even Prime Minister David Cameron is warning about a second global crash.
Insurance isnt exactly a profitable business, the money comes from investing customer premiums. If the stock market wobbles next year, the subsequent fallout could quickly put this deal in a different light.
This isnt Barclays taking over ABN Amro, but even so.
Bigger And Badder
Im not convinced big is beautiful, either, the banks and insurers that have done best since the financial crisis have largely done so by becoming meaner and leaner.
Blending legacy IT systems will also be messy.
Management loves a good takeover. But I would rather that Avivas team had used their energies to rebuild what they had, rather than piecing together a whole new entity.
I certainly wouldnt buy Aviva now. And Im sorely tempted to sell.
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Harvey Jonesowns shares in Aviva. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
