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Manulife bid drops in value

Fall in stock price shaves almost $1b off original figure

Manulife Financial Corp.'s bid to acquire John Hancock Financial Services Inc. has dropped almost $1 billion in value in the five days since the deal was priced, as Wall Street gave a generally tepid reaction yesterday to the merger of the two insurers.

Company executives said Sunday the deal was worth $10.9 billion, based on Manulife's closing stock price Wednesday of $31.72. But Manulife stock fell sharply Friday and yesterday, as the deal moved from speculation to reality. Yesterday, Manulife stock fell $1.02, or 3.4 percent, to close at $29.18 on the New York Stock Exchange, placing the value of the deal at a shade over $10 billion.

At a press conference in Toronto yesterday, the companies outlined plans to slash more than $250 million in expenses annually -- and bolster sales in a quickly consolidating industry -- but acknowledged one potentially thorny issue to resolve: Huge disparities in pay between Toronto-based Manulife and Boston-based John Hancock.

Not only did Hancock chief executive David D'Alessandro pull in nearly nine times as much pay last year as Manulife CEO Dominic D'Alessandro, who is no relation, but Manulife's D'Alessandro made less than either senior vice president at Hancock or Wayne A. Budd, Hancock's executive vice president and general counsel. Budd's nearly $5 million pay package far outstripped the $2.3 million taken home by Dominic D'Alessandro.

"Executive compensation is one issue we're going to have to face up with," Dominic D'Alessandro said yesterday. "Some reconciliation of the two compensation systems is going to take place." He gave no indication, however, of whether Manulife directors are likely to order steep pay cuts for the Boston Hancock executives or raise overall executive compensation. Hancock executive pay last year, including D'Alessandro's $21.7 million, included large stock distributions and other one-time incentive payments.

"David and I are keen at avoiding friction," Dominic D'Alessandro said. "We are going to give it our best shot."

The deal calls for Hancock owners to get Manulife stock at the rate of 118.53 shares for every 100 Hancock shares they own. It does not include any "collar" provision often found in merger deals -- which sets a dollar-figure floor for the deal value if the acquirer's stock drops -- so Hancock investors' gains are tied directly to the performance of Manulife shares between now and when the deal closes, probably sometime next spring.

At yesterday's Toronto press briefing, Hancock CEO David D'Alessandro intimated that other companies may step up with a bid to rival Manulife.

"Anyone else that wants to enter, I would be surprised if they would be able to find this kind of complementary businesses. But it is a free market," said David D'Alessandro. If Hancock breaks off the deal with Manulife, it would have to pay the Toronto firm about $327 million, plus expenses.

Dougall MacPhee, a Toronto-based life-insurance stock analyst with Raymond James Co., said in an interview yesterday he estimates there is a 60 percent chance the deal will go through as announced, a 20 percent chance a higher bid will come in that Manulife will exercise an option to match, and a 20 percent chance a higher bid is made "and Manulife walks."

"I don't think for the stock to drop by $1 is too unusual," MacPhee said, adding that much of yesterday's selling appeared driven by short-term profit-takers and traders executing "technical" sales to profit from factors such as the likelihood John Hancock will be removed from the Standard & Poor's 500-stock index, a common industry benchmark that is followed by several "index" mutual funds.

Wall Street reaction was mixed. Analyst Vanessa Wilson of Deutsche Bank called the combination "a good deal for both Manulife and John Hancock holders." But Jason Zucker, an analyst with Fox-Pitt, Kelton, a New York-based unit of Swiss Re, urged clients in a research note "to sell into strength" and take profits now.

David O. Lewis, senior insurance analyst with SunTrust Robinson Humphrey, an Atlanta-based money manager and investment banker, said that since Hancock executives have been openly courting a deal for the past three years, "shareholders of John Hancock may be disappointed they didn't get a bigger premium."

Analysts calculated that the price Manulife offered to pay for Hancock amounted to the equivalent of 1.6 times the book value of John Hancock, well short of the average 2.36 multiple in 12 industry acquisitions over the past year, according to data compiled by Bloomberg News.

A combined Manulife-Hancock would rank as the eighth-largest US insurer by premiums, according to A.M. Best & Co., an Oldwick, N.J., firm that compiles industry rankings and performance evaluations.

Peter J. Howe can be reached at howe@globe.com; Scott Bernard Nelson at nelson@globe.com.

Hancock sold

(Globe Staff Graphic / John Bohn)
Video NECN: Manulife Purchases John Hancock
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