How would RSA and Aviva slot together?

While a merger between RSA and rival insurer Aviva’s general insurance arm could make strategic sense, the combination will not be easy, and many changes would be required to make a perfect fit.

And, despite the cost savings that could be realised by such a deal, there is no guarantee that a revised offer from RSA would tempt Aviva to part with what it deems to be a core unit. Aviva rejected RSA’s £5bn offer last week on the grounds that it was too low and that it wanted to retain its composite insurance model.

One of the compelling reasons for merging RSA with Aviva’s GI business is that the similarity between the two businesses would generate cost savings. “There is a lot of overlap between the operations because they were competing across the board, so you could probably use one set of systems, one set of people dealing with brokers and one set of people dealing with claims,” says Collins Stewart analyst Ben Cohen.

RSA itself suggested that it could make £300m in cost savings by fusing the two companies.

Pruning required

However, the overlap could be a blessing as well as a curse. It could take a lot of work to whittle away the duplicate parts of both firms to arrive at a coherent whole. While it may be possible to use a single system for example, it may take money, time and effort to get both companies up and running on it.

Cohen points out that both firms largely write the same lines in the same markets and through the same distribution channels, which would require some pruning. “For example, you would have to decide what to do with the direct operations and potentially get rid of one of those,” he said.

Combining two similar businesses does not simply mean doubling the market share. The individual units, particularly on the broker side of the business, are likely to have been shown the same risks. Any new groupwide underwriting may not capture all of the business that both units would have written.

Also, brokers may not receive the merger favourably. “Historically, when you have combined these types of companies, you have lost a lot of market share,” Cohen said. “A lot of brokers would look for alternative providers to remain diversified, which is why you struggle to maintain market shares of above 20% in the UK, particularly commercial lines.”

Culture clash

Just as coping with the firms’ similarities will be tough, so too will tackling the differences. Cohen suggests the combination may be particularly challenging from a people perspective. “There are probably slightly different cultures in the two organisations and they have been big rivals for a long time,” he said.

If a deal is successful, however, the people running the combined entity may not simply be an amalgam of the exiting management teams. Aviva shareholders who backed the deal may vent their frustrations on management for standing in their way. “If shareholders force this deal to go ahead, then presumably we should expect some management changes,” said stockbroker Oriel Securities analyst Thomas Dorner.

While there are strategically compelling reasons for merging RSA and Aviva GI, analysts feel the deal is unlikely. Cohen suggests a revised bid of £5.5bn would be reasonable, but it is unclear whether this would be enough to change Aviva’s mind.

“The message coming from Aviva management is that they do not want to sell, and it is not at all clear that increasing the offer slightly would result in Aviva being more willing to sell on the basis that they want to continue to pursue the composite model,” Dorner said. “In principle, everything is for sale at the right price, but the message from the Aviva management is that they are very reluctant to sell at anything like the current proposed price.”

Out of time?

Cohen contends RSA’s bid may have come too late. Aviva’s stock is now trading at more than twice its low point in March 2009. “Strategically, the deal makes sense but I question the timing, in that 12 months, or even nine months, ago would be a much better time to have done this because Aviva was in a more straitened position,” Cohen said. "There have got to be more doubts that it can be made to work now.”

He added: “I think shareholders are generally happier with RSA’s track record than Aviva’s but I’m sceptical whether it will be enough to force through a deal at a reasonable price for RSA.”