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Berkshire Hathaway Won't Buy AIG

- By Rupert Hargreaves

Nearly a decade after the financial crisis, insurance powerhouse American International Group Inc. (AIG) is still a basket case.

The company's sixth CEO since the crisis recently announced his intention to step down, only one year into a two-year turnaround plan that was supposed to put the business on a sustainable growth trajectory.


With losses from pre-crisis bets still unfolding and staff morale understandably depressed, AIG's outlook appears bleak.

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That being said, managements that have taken the helm since the financial crisis have helped stabilize the business to some degree, but the fact AIG remains in recovery mode is enough to put off brokers who would otherwise have placed business with the company. Furthermore, the threat of further layoffs is likely undermining management's desire to write only high-quality insurance business. If, as an AIG employee, you are being judged purely on your worth to the company in monetary value, surely it is in your best interest to write as much business as possible with little regard to the long-term quality of such business?

A buyout?

One solution to these issues being tossed around Wall Street is an acquisition of AIG by Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B).

In many ways, such a deal is not wholly unbelievable. With a market capitalization of just over $60 billion, AIG would be a bite-sized snack for Berkshire, which reported over $86 billion of cash at the end of 2016. Berkshire would fund part of the deal with debt, still leaving it with plenty of money for corporate purposes.

But would Buffett ever consider buying AIG? Is the business high-quality enough for his conglomerate? There are several reasons why he may like to buy the business.

Reasons to buy

For a start, probably the most appealing reason is it will allow Warren Buffett ( Trades , Portfolio ) to get his hands on AIG's insurance float, which is worth $388 billion.

With his magic touch, the returns generated from this float could be significant and, assuming a basic growth rate of 10% per annum, might pay for the deal within two years. Compared to Berkshire Hathaway, AIG has adopted a relatively conservative method of investing its float by sticking to fixed income investments.

A different investment strategy would depend on lifting the constraints placed on AIG after its financial crisis bailout, which is not likely in the near term if the company remains a standalone business.

If AIG were to combine with Berkshire, however, regulators may decide to lift these constraints as Berkshire's size is big enough to weather any losses from the AIG business without having to go to U.S. taxpayers to ask for another bailout. In additon to the possible lifting of restrictions, a Berkshire buyout would also help improve the morale of staff and convince brokers to place business with AIG thanks to the financial backing of the Berkshire group. To put it another way, a Berkshire acquisition would dramatically speed up its recovery.

Buyout unlikely

Still, it is unlikely Buffett will move to acquire AIG anytime soon as the company does not meet his typical investment criteria.

For a start, Berkshire Hathaway typically avoids turnaround situations. Secondly, Berkshire likes profitable businesses it can leave to run by themselves, not turnaround situations that may still have nasty surprises on the balance sheet.

Last of all, and this is likely to be the largest obstacle to any possible deal, is AIG's existing regulatory oversight. Buffett likes to do as he pleases and hates being told what he should do by regulators, which is why AIG with its SIFI status would never become part Berkshire since it is unknown whether the designation would be taken away when brought into a larger group. In the worst-case scenario, by acquiring AIG, the whole of Berkshire may attract SIFI status, a designation that may ultimately change the conglomerate for the worse and limit its activities.

While a Berkshire-AIG deal could be justified, any combination is extremely unlikely for the foreseeable future unless Buffett decides to change his investing strategy.

Disclosure: The author does not own any stock mentioned.

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This article first appeared on GuruFocus.