Tata Has Option To Buy Out AIG
Tata & Sons could decide to exercise its option to buy out the remaining 26% stake it does not already own in its insurance joint venture Tata AIG from its joint venture partner AIG. Currently Tata is the majority partner and owns 74% of the company, this could increase to 100% if AIG decides to sell its stake and the joint venture company would then become a wholly owned subsidiary. Tata & Sons so far have refused to comment on the possibility.
Tata insiders admit that there is in fact a clause in the JV agreement which says Tata & Sons can buy AIG’s stake in the joint venture in the eventuality of a change in management control of AIG. Industry watchers believe this has every possibility of occurring should AIG’s businesses be taken over by another insurer.
There is a strong likelihood that the US government will force AIG to sell its international business entirely or in parts to rival insurance companies. The right to buy out the foreign partner in the event of a takeover is a standard condition in all Indian joint venture contracts. The main reason why Tata & Sons would want to exercise its option is that almost all the companies being talked about as suitors for AIG’s Asian business are present in India and are therefore competitors. It would not make sense for the company to partner with these companies, whilst trying to capture domestic market share for itself unless it planned on merging. More importantly IRDA, the Indian insurance regulator, does not allow for foreign insurers to hold stakes in more than one company in the same business. Any insurance company that purchases AIG’s business in Asia will require the approval of IRDA if they also wish to own a stake in the Indian operations of the insurer.
Beauty is in the eye of the beholder
Potential suitors for various parts of AIG’s insurance operations include European insurers Axa, Allianz Insurance, Generali, Prudential and Zurich Financial. Other than Zurich Financial, all of the other insurance companies are present and have operations in India. Besides the European insurers, there is speculation that cash rich Japanese insurance companies may also want to make a bid. There is also talk that Australia’s largest insurer QBE is interested in AIG’s Asian business. QBE too has a presence in India.
At the moment, Tata AIG is managed in India by AIG executives, Trevor Bull runs the company’s life operations in the country whilst Gaurav Garg heads up the non life business, both executives were originally with AIG, before coming to India to head up the joint venture. Unlike European insurers where various lines of business come under a country head, AIG’s operations are structured in such a manner that several product lines report directly to headquarters in New York. This structure would probably have to change if various businesses were sold separately and local businesses could lose some of the advantages of the AIG franchise.
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