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June 29, 2009; Posted: 10:46 AM Are you looking to increase your ETF knowledge? OLDWICK, N.J., Jun 29, 2009 (A.


Best via COMTEX) -- VR | Quote | Chart | News | PowerRating -- Hostile takeover attempts -- such as Bermuda insurer and reinsurer Validus Holdings Ltd.'s bid to acquire IPC Holdings Ltd.

-- are rare in the insurance industry, but can be successful, industry observers said.

"It's very unusual," said Dave Simons, Deloitte's insurance mergers and acquisitions leader.

"It just typically does not happen." In March, after IPC and Max Capital Group Ltd.

announced plans to merge, Validus made an unsolicited counteroffer to buy IPC instead of Max.

While the IPC board rejected Validus' proposal and urged shareholders to support the merger with Max, IPC shareholders rejected the Max plan earlier this month.

Max withdrew its offer, and Validus has continued to pursue its merger plan -- even without the blessing of IPC's board.

IPC said it has spoken with Validus, but would also speak to other potential suitors.

IPC said it still opposes the Validus offer because it's a discount to book value.

Validus said it would not raise the purchase price for IPC, and was now asking shareholders to vote to hold a special shareholder meeting, at which time Validus could move to vote out IPC's entire board.

Such a transaction is "far rarer than friendly acquisitions, but they certainly are evident," said Jay Chatzkel, principal of Progressive Practices, and co-author of the book "Beyond the Deal: Mergers & Acquisitions that Achieve Breakthrough Performance Gains." Most insurance M&A deals are done as a sort of auction, Simons said.

Four to six interested parties may receive a book on the target company from an investment bank.

The companies conduct due diligence on the target, and then can bid to buy the company.

This allows the target company's board to compare multiple bids to pick the best one, while giving the bidders a chance to examine the target company.

Sometimes a company will enter into a private negotiation with another company, and the two negotiate terms and conditions for a merger confidentially, without soliciting bids from other companies.

When the transaction is announced, another company may try to jump in with a counteroffer when they realize the target company is in play.

"It awakens the sleeping giant," said Chatzkel.

"Somebody may not have had any interest in the company until someone else made the move to acquire it." That doesn't necessarily mean that new bid would be unwelcome.

"The third party entering the transaction may be an even better merger party, and it may not turn into a hostile transaction," Simons said.

A so-called hostile takeover attempt is when one company attempts to buy another company without the approval of the target company's board.

Companies often take steps in their by-laws to protect themselves from a hostile takeover attempt, said Justin Pettit, partner of Booz & Co.

and co-author of the book "Merge Ahead: Mastering the Five Enduring Trends of Artful M&A." Defensive measures include a "poison pill" -- a measure that makes the target company's stock too expensive or otherwise unattractive to an unwanted acquirer.

Companies can also stagger the terms of board members so they couldn't be voted out at once.

"To be honest, it doesn't look as if IPC's adopted the strongest anti-takeover measures in the world," Pettit said.

He also said some companies make it a policy to not undertake a hostile takeover.

"It generally leads to a higher price," Pettit said.

"It can also be a much more difficult integration because of the animosity.

There's likely to be a loss of talent, and it might be difficult to work together to plan an integration in advance of the close, given the hostilities there." It's not unusual for the target company facing an unsolicited merger offer to speak to other would-be suitors, Simons said.

"The directors have a fiduciary duty to act in the shareholders' interests to maximize shareholder value," Simons said.

However, hostile takeovers can be successful, Chatzkel said.

"If you can show that you have a basis to provide the best return of investment, and you can demonstrate that to the stakeholders, they have a responsibility to go for the best option," he said.

But there are two hurdles for hostile takeovers, Simons said.

"One challenge is mending fences with the management of the acquired company and the board of directors.

The second concern...

is due diligence is much more difficult in a hostile takeover than it is in a friendly acquisition." Insurance M&A is "fairly risky already," Simons said.

"The two biggest focuses are on your investments and your reserves, and both areas require substantial information from the company to conduct adequate due diligence.

Without that level of detail, it is difficult to quantify what exposures might be inherent in investment portfolios or the reserves." Deloitte expects to see more M&A activity this year in the insurance sector as the credit markets become more favorable, Simons said.

(By Meg Green, senior associate editor, BestWeek: [email protected]) For full details on Validus Hlds Ltd (VR) click here.

Validus Hlds Ltd (VR) has Short Term PowerRatings of 4.

Details on Validus Hlds Ltd (VR) Short Term PowerRatings is available at This Link.

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