Normally, when a company receives an acquisition offer they don’t want, they do one of two things: sell to someone else or stubbornly refuse to sell, usually due to a belief that they are being undervalued by the acquirer.

When faced with these two choices, American Equity (AEL) opted for door #3: a blocking investor in Brookfield Asset Management (BAM) and left everyone feeling like they lost.

Rather than accept a $36 offer from the MassMutual/Athene collaboration, they took $37 from BAM…for 20% of the company. The stock immediately dropped from $32 to $27 as investors digested the news that they would never be able to sell their holdings at $37.

The board has yet to explain why they thought this was the right move (other than a predictable quote in the press releases about “long term shareholder value”).

* Just in case anyone is wondering, I don’t own shares in any of AEL, BAM, or ATH so I have no personal agenda here.

How To Say No Responsibly

Part of creating long term value is enhancing your multiple, not just your growth. Multiples are higher when investors think you might sell some day. When you put in a blocking investor who will dissuade other suitors from approaching you in the future, that is bad for your multiple.

While it may be trendy these days to put shareholders behind other stakeholders, there is one group I think all can agree they should take precedence over: entrenched management.

The board needs to ask itself if they are acting in the best interests of shareholders or the management team that wants to, presumably, keep their jobs.

Additionally, if you are going to turn down a credible offer, the board, together with management, should make the case for why that is the right decision. Put together a presentation, have a conference call, meet with investors, etc.

A one page press release doesn’t cut it. It tells shareholders “we don’t care about you and we’re not even going to pretend that we care about you.”

But don’t worry…they’re going to do a stock buyback with the proceeds…excuse me??? Who is going to sell that stock to you? Oh right, the people who are disgusted with you and no longer want to own the stock. Talk about kicking someone while they’re down!

Also, the idea that the company should be given the breathing room to focus on operations so they can sell at a higher price down the road doesn’t hold water. AEL has been informally for sale for several years now. Every potential buyer has likely put in at least a feeler to see what it would take and didn’t like what they heard.

By saying no to Athene and effectively taking themselves off the market, AEL is risking an Aspen/Endurance situation where they never see a bid this high again.

What Exactly Is BAM Up to?

So what’s in this for BAM? It appears like they’ve set $200M on fire (the gap between $37 and where the stock is trading). That seems pretty dumb. Either they got really bad advice on where the stock would trade on the news or they have something else up their sleeve.

What might that be? Well, they did get AEL to commit to $10B of reinsurance. Assuming they paid market terms for that, there is no reason to light $200M on fire to access that business.

Thus, suspicious people like me will naturally wonder if BAM did, indeed, pay market terms or are they being given goodies on the reinsurance transaction to offset the stock losses?

After all, BAM could have bought their stake on the open market in the $20s. There were plenty of desperate sellers who needed to get out after AEL rejected Athene. Why pay $37 (and give AEL the capital to then launch their own buyback where they will buy it back cheaper) instead?

This is quite the mess. If BAM isn’t getting anything special out of the reinsurance deal, then they have a D&O suit on their hands for overpaying for the stock. If there is a side deal on the reinsurance, well, there is certainly some regulatory risk in that approach that I would have advised against.

Even if they think this puts them in the pole position to acquire the whole company someday, it still doesn’t require paying a control premium on the first 20%.

Go look at what Enstar did with Watford. They bought their initial stake cheaper on the open market before launching an offer for the rest of the shares.

So something very fishy is going on here. Again, AEL needs to provide transparency to their shareholders and explain why they took the BAM offer and why it was preferable to just saying no to Athene and continuing on independently?

How To Fix It

To be clear, I am not of the view that just because Athene made an acceptable offer that AEL is bound to take it. What am I asking for is AEL to explain their decision and communicate how turning down the Mass/Athene offer is in the shareholders’ best interest.

It would also be helpful to begin a formal process where they solicit other offers to see what other options they have. If they can’t find anything acceptable, then falling back on the BAM offer may be the best path.

But it should only be pursued after they are sure there are no better offers rather than as a tool to scare away other offers. In simple terms, the only reason to ever turn down an offer is because you think it will encourage someone else to make a higher offer. The BAM deal does just the opposite.

As a final thought, if BAM wanted to buy 20% of the company, AEL should have structured the purchase as a tender offer that existing shareholders could sell into. That way, the shareholders would benefit rather than AEL getting all the upside and then buying back the shares on the cheap adding insult to pain to the disappointed shareholders.