The Pru still has the urge to merge

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The Independent Online
News Analysis: If Sir Peter Davis's Prudential links up with Halifax, he'll gain both a life insurance company and a building society THERE IS a story, probably apocryphal, doing the rounds. It concerns an insurance company gathering a few years ago - one of those conferences so beloved of the industry's senior executives, called to discuss the sector's future.

At the end of a gloomy session in which experts predicted that the total number of insurers would halve in the next decade or so, one corpulent chief executive is said to have said to another: "This means there'll be no more jobs around for people like us."

In truth, the predicted contraction of the insurance industry has been happening for some years. Mergers and takeovers since the early Nineties have seen a number of old, highly respected companies bite the dust. And yes, there are fewer chief executives around.

The roll call of the past decade is impressive - Scottish Mutual taken over by Abbey National; Scottish Equitable acquired by Aegon, a Dutch insurer; Life Association of Scotland snatched by Britannia Building Society.

Other deals include Provident Mutual taken over by General Accident, the Halifax's acquisition of Clerical & Medical and Royal Insurance merging with Sun Alliance. Earlier this year Commercial Union and General Accident merged to form CGU.

Some companies have simply packed their bags and left the scene, including London Life, which shut up shop in 1995 and declared it was closing itself to new business.

Demutualisations, previously seen as the preserve of building societies, have also struck in the insurance sector. Last year Norwich Union, a 200- year-old insurer, became a publicly quoted company. It has announced plans to buy London & Edinburgh for pounds 315m.

The consolidation seen in the insurance sector has been driven by the prospect of static and sometimes falling volumes of new business, coupled with rising costs. This is coupled with a move by many insurers to develop a stronger presence abroad - reasons cited both by Royal & SunAlliance and CGU for their respective mergers.

Roman Cizdyn, insurance company analyst at Merrill Lynch, says: "Many of the mergers we have seen have been based on the premise that by combining two large organisations it should be possible to strip out unnecessary costs, adding value to the new business."

When Royal Insurance and Sun Alliance announced their pounds 6bn merger in 1996, the premise was that the deal would bring savings of pounds 175m a year, at the cost of more than 5,000 jobs of the combined workforce of 28,000. The merger of Commercial Union and General Accident, earlier this year, is likely to mean pounds 225m of savings in the first 24 months. Norwich Union's takeover of London & Edinburgh is expected to lead to a loss of 600 of the smaller insurer's 2,000 jobs, with savings of pounds 35m.

The same pressure to consolidate has also been apparent in building societies, with a number of venerable societies being taken over or demutualising. Last year the Halifax, Woolwich, Alliance & Leicester and Northern Rock floated. In the past four years Bristol & West, Cheltenham & Gloucester, National & Provincial and Birmingham Midshires have also lost, or are about to lose their mutual status.

Prudential's activities in this market have been relatively low-key. Last year it won the battle for Scottish Amicable, a company selling mainly to financial advisers, fending off two other bidders, Abbey National and AMP, an Australian financial services firm.

But the Pru's strategy is not about consolidation within the insurance industry alone. Two years ago, in an interview with The Independent, the company's newly-appointed chief executive, Peter Davis, mapped out a different vision of the future for financial services companies.

Sir Peter, as he now is, said: "There is a growing tendency towards convergence, where the banks, building societies and life companies are coming together. Banks are buying building societies, building societies are opening life companies. In the next five years, I think we will see the emergence of six or seven major retail consumer financial players, and I want the Prudential to be among them."

This view of the changing face of the UK financial services industry led Prudential to confirm repeatedly that it was in the market to buy a building society, although it retreated after being linked to every demutualising society - at prices which Sir Peter described as far too expensive.

Yet echoes of this vision are still apparent in Prudential's latest annual report, in which Sir Peter says his company's objectives are "to expand our product range and distribution capabilities and grow our customer base."

Egg, the new telephone and mortgages venture launched last month by the Pru, falls into this category. But analysts believe that despite talking down rumours of a building society or bank acquisition, Sir Peter is still on the acquisition trail.

One says: "It is well known that Prudential has held talks with a number of prospective partners in the past year or two, but they have got nowhere. Even if this deal does not succeed, he is determined to get something under his belt."

Whether Halifax is the right partner for the Pru is another matter. The Halifax is valued at pounds 20bn compared to Prudential's pounds 16bn, making a merger, on a share-per-share basis, the most likely scenario.

Halifax has 21 million customers who do business with it through its 840 branches, plus a further 600 estate agencies. It also owns Clerical Medical, the IFA-brand insurer, which manages assets of pounds 20bn.

The City has recently expressed its dissatisfaction with the former building society's failure to capitalise on its market strength since its flotation last year, and some analysts believe there would be a strong fit between the two parties, linked to Sir Peter Davis's vision of the future financial services sector.

However, Mr Cizdyn says: "The problem is that there would be few economies of scale involved in a merger of this sort compared to, say, another bank. There would be the problem of what the Pru and Halifax do with their IFA- based insurance companies."

Robert Mumby, insurance analyst at CSFB, says: "My initial reaction is to be sceptical. Prudential seems to be doing quite well on its own, although there has been a fixation with size in the past and of wanting to be a major institution. But I am ambivalent [about this possible merger]."

Prudential is known to have approached a number of different companies and building societies with the aim of consolidation within the financial sector as a whole. Only its takeover of Scottish Amicable has come off.

Before Prudential's takeover of Scottish Amicable last year, Sir Peter refused to be drawn on his company's preference for mergers or acquisitions.

But Sir Peter did say: "The balance is in favour of a life company, but we are also studying whether we would achieve our objectives as well, or better, through a building society."

There is a possibility that, within the next few months, he may well have both.

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