While the Validus offer generally traded marginally above the indicated value of the Allied World transaction prior to the termination, this small premium does not compensate our stockholders for the strategic and financial shortcomings of its offer. In fact, the Validus offer is inadequate on both a relative and absolute basis, for the following reasons:
- Insufficient valuation – The proposed deal is considerably less than a book value for book value exchange. Validus arbitrarily seeks to charge Transatlantic stockholders for what it perceives to be a $500 million reserve shortfall. This is the primary reason that Transatlantic stockholders would receive only 48% of the future earnings of a combined company versus 52% in a book value for book value transaction taking into account the cash component of Validus' offer. The proposed transaction also results in Transatlantic book value per share dilution of 10%.(4)
- Less-than-optimal domicile – While Validus is domiciled in a favorable tax jurisdiction, Bermuda is without a U.S. tax treaty. The resulting 30% withholding tax rate on dividend distributions from U.S. subsidiaries creates significant frictional costs as compared to the domiciles of other potential partners.
- Undercapitalized EU subsidiary – There is questionable flexibility to fund a subsidiary that could support $1 billion-plus of international premiums.
- Negative impact on ratings – The combined company will likely carry lower ratings than Transatlantic on a standalone basis.
- Uncertain financial flexibility – Property catastrophe concentration adds earnings volatility and capital management risk.
- No U.S. insurance company – The transaction does not advance our objective of broadening distribution to U.S. specialty business not available to reinsurers.
- Cultural incompatibility – Validus has centralized underwriting, a stated distaste for the casualty business, and a short, six-year operating history compared with our 30-plus years.
- Questionable upside for stockholders – There is less than fair ownership in the combined entity for Transatlantic stockholders and a lack of due diligence.
Put simply, our Board believes if a "partner" is going to deliver less ownership than a book value for book value transaction would imply, compromise Transatlantic's ratings, bring a questionable strategic rationale, and refuse to engage in mutual due diligence under customary terms, then it needs to offer significantly greater value to our stockholders.
Validus' failure to develop an offer that we could recommend to our stockholders is no one's fault but its own. Validus chose not to accept the path that was right in front of it: Sign the confidentiality agreement with the standstill and conduct due diligence. Instead, Validus contested our confidentiality agreement in Delaware Chancery Court. Consider that the Delaware court indicated that Validus should sign the confidentiality agreement with a standstill and that both Allied World and National Indemnity signed the same agreement, and in our view it is clear that Validus' position on this matter was not reasonable.
Additionally, Validus' allegations of Transatlantic Board entrenchment are false. In the Allied World merger we previously recommended, our Chairman would have stepped down after one year; our current CEO was to have retired as part of the transaction; and our current COO and soon-to-be CEO would have waived a retention bonus and would have reported to Allied World's CEO. The Allied World merger triggered no Change in Control provisions for Transatlantic management. The Validus proposal would trigger Change in Control provisions, making a Validus combination more lucrative for much of Transatlantic management and many employees.
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