The listed financial group, Allianz Malaysia and MNRB, the listed Malaysian general reinsurance firm, has ended negotiations to acquire Takaful Ikhlas, the Malaysian Islamic insurance company, according to a stock exchange announcement.
We refer to our announcement made on 20 December 2010 in respect of the commencement of negotiations with MNRB Holdings Berhad (“MNRB”) on the proposed acquisition of equity interest in Takaful Ikhlas Sdn. Bhd. by the Company (“Negotiation”) and the updates in respect thereto as reported in the Quarterly Report of the Company for the financial period ended 31 March 2011.
We wish to announce that AMB and MNRB have mutually agreed to end the Negotiation.
There were other interesting pieces of news on Bank Mutiara in Indonesia and local Japanese banks which I wanted to do some desktop analysis on, but I chose this piece instead because, well, acquisition talks have ended so if I don't talk about it today I will never get to talk about it again.
1. Takaful Ihlas
To begin talking about this company, it's probably useful to give you all a 101 on what "Takaful" means. Some of you may be more familiar with the term "Islamic Banking", but in this part of the world we insist on calling it "Takaful", much like how the French insist on calling their sparkling wine "Champagne".
In the laws of the Islamic religion, or "Shariah", the payment and acceptance of what is known to us as "interest" is forbidden. My further understanding is that Muslims can only be paid for the work, and not simply for extending the use of money. As can be imagined, this creates a big problem for their banking system, as nobody would be allowed to have mortgages or personal loans or credit cards etc.
Takaful banking is a magic trick that transforms such transactions into "allowable" transactions under Shariah (and only the top banking magicians know how to do this). Thus Takaful banking is very quickly growing in popularity due to the large population of Muslims across the world, which also explains why Takaful Ihlas is a sought after acquisition target.
Takaful Ihlas is a life and general insurance company in Malaysia, wholly owned by MNRB Holdings, which provides Takaful insurance products for individuals and commercial enterprises. It was established in 2002 and primarily distributes its insurance products through trained agents across the country.
2. MNRB & Allianz
Allianz is a global financial services company based in Germany, and since it outside of Asia and frankly quite a household name, I won't spend any time on it.
MNRB Holdings is, as its name suggests, a holding company. It operates through its subsidiaries primarily in insurance, reinsurance, takaful and retakaful businesses. You're probably thinking...woah hold on, retakaful?? There's more magic in banking than a Harry Potter novel! Bottom line is, writing Harry Potter books can be very profitable, and so can Takaful banking.
Based on reader feedback on this blog, it seems that I should spend a little more time describing finance fundamentals, and since I genuinely appreciate all your comments that is what I will do.
Just now I mentioned reinsurance (and subsequently retakaful) - I will try to explain this. Insurance companies underwrite insurance policies and take on risk. For example in a health insurance policy, you pay a certain premium to the insurance company every month, but if you get sick, they will pay your doctor's bill. Thus, insurance companies take on the "risk" of you getting sick. Sometimes, after some lengthy number crunching and actuarial science calculation process, they will decide that they have taken on too much risk, so what can they do to de-risk? This is where reinsurance companies come in - insurance companies can transfer their excess risk to reinsurance companies, who will then charge them a fee. Fundamentally, reinsurance companies exist as a risk management process for insurance companies.
I hope that is clear, although at the same time it leaves me very little space to discuss much more.
Final Commentary: Why did the acquisition talks break off?
From an outsider perspective, (I am not an insider to the deal, and if I was I wouldn't be sharing any inside information anyway...) there seems to be 3 likely reasons in my opinion.
The first is price - Takaful Ihlas had a net profit of approx MYR9.5mn (USD3.2mn) in 2010, which corresponds to an ROE of approx. 4.8%. For a company which is low in profitability, but in a perceived high growth market, it is always the tendency of the seller to value themselves based on an aggressive growth factor. On the other hand, the buyer will usually take a more prudent approach to value the company in its current condition. This will usually thus create a pricing expectation gap which is difficult to close.
The second is management control - my understanding of the deal is that Allianz would not be acquiring the entire 100% stake in Takaful Ihlas. So how much they will buy, the corporate governance of the company post deal will be a major debating point.
The third is post-deal arrangements - both Allianz and MNRB are insurance companies. Subsequent to the deal, how will their businesses be arranged in order not to cannabilize each other? How would the entities be properly incentivized in order to make this a value adding deal? This will always be difficult.
That's it for today, goodnight everyone.
P.S. I am not looking forward to a long day at work tomorrow...
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