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Investors nervous over Manulife’s Asian strategy

AIG has a one-third stake in Asian insurance company AIA.


Editor's note: An earlier version of this story incorrectly implied that Manulife might buy AIA's Japanese business. We apologize for the error.

Manulife's top executives sought to assure the market last week that they don't intend to do an acquisition "for ego or size" -- but not all shareholders are convinced yet.

Mark Street, a London-based former investment banker (who is now helping set up companies in the Middle East) has decided to go public with his concerns that Manulife might spent billions of dollars on a deal for at least some of ING Groep LV's Asian business, a prospect that he believes is acting as a drag on Manulife's stock price.

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He says he bought some Manulife stock for his personal investment holdings earlier this year. He thought it was trading at a good value and that the company could be an impressive turnaround story. Now he's worried that a deal with ING could drag Manulife's shares down another 10 per cent or more.

He's not normally one to go public with his concerns about a stock, and he has not discussed his concerns with Manulife's management.

"I confess that over the years I've lost quite a lot of money investing in various stocks and I feel that had somebody spoken up and done something the situation could have been different," he said by phone Monday. "I felt that maybe finally I should actually try to do something instead of keeping quiet."

ING Groep is in the final portion of a sales process to unload its Asian life insurance operations in various countries, and media outlets have reported that Manulife and its Asian rival AIA are at the front of the pack among bidders, at least for the Southeast Asian assets.

ING's Asian business includes operations in Japan, Malaysia, South Korea, Thailand, Hong Kong, China and India. The company had sought to sell the operations as a whole but is now more likely to split them up. Manulife is already in most of those countries, but it would like to expand in Malaysia and Thailand (both of which it entered as part of its $15-billion merger with U.S. life insurer John Hancock in 2004) and India and South Korea remain gaps in its portfolio. ING is expected to announce final transactions for the operations by the end of this month.

Some analysts have said that Manulife's share price is suffering because of the prospect of a deal, and the insurer's executives have made efforts to calm the market.

"While we continue to see Asia as a very attractive area to invest in, any deal must be positive for shareholders," Manulife's new CFO, Steve Roder, said on a conference call last week. "Any transaction would have to be highly strategic. It must contribute to stabilizing our core earnings and capital, provide diversification benefits, not add any significant risk exposures, be easily financed, and not be inappropriately dilutive."

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Many analysts and shareholders took comfort that the comments meant, at the very least, that Manulife will not buy ING's Japanese business, which could add to the risky variable annuity exposure that Manulife has been working so hard to curtail.

But Mr. Street, who listened to last week's conference call, is not so sure.

"The rumours that I've heard were that Manulife submitted a bid for $3.5-billion for the Southeast Asian assets and another $1-billion for Japan," he said. "Any shareholder would rightly question how deploying that amount of capital to acquire an additional platform in Asia, which overlaps with theirs, would achieve the best returns when there are lots of organic opportunities."

"If the rumours are correct – and they may very well not be – but if Manulife is perhaps considering going for the Japanese assets, then that would be majorly bad news because of the variable annuity exposure," Mr. Street added. "What I believe to be true is that ING is perhaps making Japan a condition for the other parts of the business."

Mr. Street is the first to acknowledge that the speculation he's hearing could be completely false, and that Canadian executives tend to be more circumspect about what they will say when it comes to M&A prospects. But he wants Manulife CEO Don Guloien to state flatly that the company has not and would not bid any significant amount for these assets.

"To me [the conference call comments] were as clear as mud," Mr. Street said. "If they come out clearly and say that they're not going to do this, then I think the share price will bounce."

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He calls the prospect of any deal "a very speculative acquisition which in many respects would possibly overlap with their existing network. And figuring out the synergies and overlaps is in itself going to be a fairly full-time occupation, and might divert management's attention from what's really going on."

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