Friends tries to turn tables on Resolution in merger battle

Insurer sees benefits of a combination, but says it should be the lead party

Friends Provident, the insurer targeted for takeover this week by the financial services group Resolution, yesterday attempted to turn the tables on its stalker, in effect launching a takeover bid of its own for the vehicle.

Friends has written to Resolution accepting the potential benefits of a consolidation between the two groups, but suggesting that it should take the lead in any merger. It has proposed that Resolution shareholders swap their holdings for shares in Friends, which would then become the holding company for the two businesses.

Friends also wants its chief executive, Trevor Matthews, to become group chief executive of the combined group, with Resolution's Mike Biggs serving as chairman. Clive Cowdery, founder of Resolution, which was set up to acquire financial services businesses, would become deputy chairman of the business under Friends' proposals, responsible for acquisitions strategy.

Friends' move follows its formal rejection on Monday of an approach from Resolution. The insurer said then that it had concerns about Resolution's proposed dividend policy, as well as serious worries about its corporate governance structures.

Sir Adrian Montague, chairman of Friends, added last night: "We recognise the shareholder value which consolidation could bring and we can see the benefits of combining two strong executive teams with complementary skills and experience. The potential of the new group will only be realised if we have the right structure from the outset."

The move will be seen as an audacious attempt to wrestle the initiative from Resolution, and marks a return to the so-called "pacman defence" invented during the 1980s, in which takeover targets turn on their suitors.

Resolution would only say yesterday that it welcomed its rival's "endorsement of the benefits of Resolution's consolidation strategy and recognition of the value potential to Friends Provident's shareholders being part of Resolution's plans for the UK life sector". The two companies are now set to hold further discussions.

Friends appears to believe that while Resolution's strategy of acquiring under-performing financial services companies represents an opportunity, such a strategy would be better executed under its own brand.

However, City analysts said they were not convinced that Mr Cowdery would be prepared to give up control of Resolution to Friends, even if he continued to take the lead role in exploring future potential acquisitions.

Mr Cowdery has been the driving force behind Resolution in both its incarnations. The first Resolution was eventually sold to the closed life insurer Pearl in 2007, after a series of takeover battles that ironically began with a merger deal between Resolution and Friends. That agreement fell by the wayside following Pearl's takeover, but Mr Cowdery kept the rights to the Resolution name and relaunched the company last year in its current format. It has £600m in cash assets and has been linked to a series of acquisition targets in recent months, including Scottish Widows and Clerical Medical.

Tensions between Mr Cowdery and his opposite numbers at Friends could be heightened by the acrimonious exchanges that have already taken place between the companies. Resolution this week found itself compelled to issue a statement clarifying its tax arrangements and the performance fees earned by its board after Friends criticised its governance standards.

Nevertheless, shareholders in the two groups, including a number of institutions which appear on both registers, such as Lloyds Bank and Aviva, are likely to press the two sides to come to some sort of agreement.

Shares in Friends slipped back slightly to 71p last night, while Resolution shares rose to 90.75p on the news.