John Hancock Financial Services, whose name is synonymous with Boston from its icon of a headquarters that towers over the city's skyline to the world-renowned Boston Marathon it bankrolls, agreed yesterday to end its 141 years as an independent company and sell itself to Canada's second-largest life insurer, Manulife Financial Corp., in a $10.9 billion deal.
The agreement, approved yesterday by both companies' boards, ends Hancock's public search for a merger partner, which took it from its backyard and a brief flirtation with FleetBoston Financial Corp. to some of America's biggest players in the financial services world, including Citigroup Inc. and Prudential Financial, to Germany's giant Allianz AG.
In the end, Hancock chief executive David D'Alessandro, who had argued that Hancock must be either a buyer or a seller in an industry dominated by much larger players, found his match in Canada, at another insurer run by another D'Alessandro, Manulife chief executive Dominic D'Alessandro. (The two are not related.)
The sale will pay shareholders a substantial premium above Hancock's recent trading range, and a 117 percent gain since the company went public in 2000. It will also mean cuts in Hancock's worldwide work force of 7,500 employees, though executives predicted most, if not all, of those cuts would come through attrition.
For Boston, it is the loss of another in a long-line of signature hometown companies that have been sold in the past two decades. For Hancock's top executives, it will mean a big payday: Because of a change in control in the company, the top 10 will now receive a combined $60 million of "restricted stock" that they would have had to wait several more years to receive otherwise; D'Alessandro's restricted stock alone is worth $22 million. Policyholders should see little, if any, effect from the combination.
Under terms of the all-stock deal, Manulife will pay $37.60 a share for Hancock, representing a premium of 18.5 percent as of last Wednesday's close before the stock began rising after a story in the Globe last week that Hancock was in an advanced stage of negotiations. Together the combined company will have a market value of $25.6 billion, making it the second largest life insurer in North America and the fifth largest in the world. Dominic D'Alessandro, 56, will be president and chief executive; David D'Alessandro, 52, will become chief operating office when the deal closes in the first half of next year and president within a year after that.
In an interview last night, Hancock's D'Alessandro described the bottom line of the deal like this: "Hancock stays. The alternatives were not pretty."
He said the Manulife chief executive called him three months ago after merger talks broke down between Prudential and Hancock. He said he was pursuing several other options, including buying Citigroup's insurance operations in exchange for a big stake in Hancock, until late last week when he decided to go ahead with the Manulife deal.
"Hancock has a storied brand in the US," said Dominic D'Alessandro. "We don't have anything like it. The notion of operating under the Hancock brand is not in the least offensive to us. Just the opposite."
Hancock's D'Alessandro said the goal is to cut $250 million in expenses, about 10 percent of the combined companies' expenses, over three years. He said he thought most of the job cuts could come through attrition, but wouldn't put a number on the reductions. As part of the deal, however, Manulife will extend by four years the commitment Hancock made when it went public to maintain the majority of its work force in Massachusetts. Hancock has about 3,800 employees in the state; Manulife has more than 700 people here. Manulife plans to maintain its US headquarters in the Hancock tower. It will also move people into the glass tower it is now building on the South Boston Waterfront, executives said.
Hancock, the sixth largest publicly traded insurer in the country, has been looking hard to make a deal. In May, the Globe reported that Hancock and FleetBoston had explored combining the two companies to ensure a big Boston-based financial services player. A month later, the Globe reported that Hancock had held far more substantial discussions over eight months with Prudential. Along the way, Hancock also talked with MetLife, ING, Allianz and Citigroup, among others.
"The issue," D'Alessandro said, "has been scale. How do you spread the costs? How do you get to the point where you are big enough you are not going to get taken out in a hostile takeover where you have no control over your destiny?"
He said he wanted to make sure Hancock did not go the way of other Boston companies that were taken over and disappeared. "If the bankers had been smart enough to do one of these, we still would have a BayBanks," he said.
Like most life insurers, Hancock had spent most of its existence as a mutual company, meaning it was technically owned by its policyholders. But in January 2000, Hancock joined the industry rush to go public, setting the stage for the eventual sale in just 3 1/2 years. At the time, D'Alessandro said going public would give Hancock the option of raising capital to grow through acquisitions or selling if that was the better course.
Some inside Hancock say D'Alessandro was always clear on his strategy: Go public, run the company for a few years and then cash out. Said D'Alessandro: "My plan has been to get bigger, not to sell."
Hancock, with its good brand name, solid distribution and a management always looking to cut costs, performed well as a public company, seeing its stock go from $17 when it began trading in 2000 to a high of $41.64 at the close of 2001, far outperforming other companies in the Standard & Poor's 500 life insurance index. If shareholders did well, so did Hancock executives, who came under considerable criticism earlier this year for their outsized compensation packages. D'Alessandro's $21.7 million pay package in 2002 was a particular lightning rod.
But the boom that helped Hancock prosper, like so many other companies, also planted the seeds of its problems of today. Hancock's financial results were bolstered by its strategy of investing aggressively in the debt of companies selling for just below investment grade. But when the bubble burst, and particularly after the market for such securities was shaken by the collapse of Enron, Hancock's strategy came back to haunt it.
Hancock had to take huge writedowns in its investments in the energy and airline industries. Inside Hancock, the biggest fear was that the ratings agencies would lower the company's credit rating making it next to impossible to compete in the sale of such instruments as guaranteed investment contracts, or GICs, one of Hancock's most profitable businesses. One of the benefits of the combination, executives said, is that Hancock's problem credits can now be spread over a larger base, putting them in line with the industry average.
The Manulife agreement calls for D'Alessandro to run the integration of the two companies, which may or may not be important in deciding where the cuts come. D'Alessandro and his top deputies have already agreed to stay for at least a year after the deal closes. If they then leave or are fired, they would also be eligible to collect under the Hancock severance packages, which includes three times their salary, bonus and long-term incentive goals. For D'Alessandro, for instance, that would amount to about $16.5 million.
Not everyone was as enthusiastic about the deal as the two D'Alessandros. Among those was Jason Adkins, an attorney and longtime industry critic who has sued Hancock, contending its executives improperly profited when the company changed from a mutual to a public company. "This company has been around since 1862. You don't get any more American than John Hancock," Adkins said. Now the company is "selling out to the Canadians, with anticipated losses and a loss of a major Massachusetts employer."
Hancock shareholders will receive 1.1853 Manulife common shares for each Hancock common shares. The sale is subject to usual shareholder and regulatory approvals.