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By ROGER CROMBIE, a Bermuda-based columnist for Risk & Insurance®

What has the potential to become a bitter dogfight has begun over the merger agreed between IPC Holdings Ltd. and Max Capital Group Ltd., with Validus Holdings Ltd. emerging as a hostile bidder for IPC and refusing to take no for an answer.

The primary drivers for the agreed deal between Max and IPC, and Validus' efforts to intervene, are diversification and scale. Each of the three companies has less than $2 billion in capital, while a combination of IPC with either suitor would result in a larger company with more than $3 billion in capital in a market that values scale. Both the agreed deal and the Validus offer are all-share, obviating the need to raise cash in today's difficult credit climate.

Max flatly rejected much of what Validus has said, but, as Max CEO W. Marston Becker pointed out: "At the end of the day, Validus will do whatever they feel is in their best interests."

He added: "They just don't have as good a proposal, because the combination of IPC and Max makes for a better company."

Validus Chairman and CEO Ed Noonan refuted that argument, saying: "We believe that what IPC shareholders get out of the proposed Max transaction is a bad deal."

At April 30, most of the regulatory approval necessary for the Max/IPC combination had been granted around the world, with only Indiana and Delaware left to approve the deal. Final approval from the Securities and Exchange Commission is also required before a definitive proxy can be issued to Max and IPC shareholders.

TIMELINE

About two years ago: IPC management considered its business model and concluded that its essentially monoline catastrophe reinsurance book requires diversification.

Early 2008: IPC engaged JPMorgan to assist with a broad review of strategic alternatives. "We looked at a very large, truly global universe of potential merger candidates," IPC Chairman Kenneth L. Hammond said, a universe that includes Validus.

Based on published reports and its own in-house knowledge of the industry, IPC's analysis enabled it to narrow its list of candidates. Validus was not on the list, because IPC concluded that a merger with Validus would represent a concentration, rather than a diversification, of risk. Validus was at the time digesting Talbot, the Lloyd's underwriter.

In due course, a long-list became a shortlist, and IPC talked and made presentations to those on the list. Evaluating its options, IPC determined that its best way forward would be through a "merger of equals" with another company. This process resulted in an even shorter list, and IPC carried out various stages of due diligence on each remaining potential candidate. It concluded that Max represented the best choice and carried out "six or seven weeks" of yet more detailed due diligence on Max, according to Hammond.

A months' long dialogue, centered on the discussion of "a number of issues," ensued between IPC and Max, said Hammond. IPC purposely interviewed Becker and his management team as part of the process. Some of the discussion centered on Max's alternative investment portfolio, the subject of extensive due diligence and how it would dovetail with IPC's own alternative investments. IPC concluded, inter alia, that Max has a strong management team and that Becker "has a lot of leadership capability, the ability to translate into action the vision he has," Hammond says.

IPC was also attracted by Max's multiple platforms and jurisdictions, its mix of insurance and reinsurance, the length of its business tail in comparison to IPC's and the potential a deal would offer for diversification. The combined scale of a merged company would offer better value to each set of shareholders and allow both companies to better manage their capital, IPC also concluded.

March 1, 2009: After weeks of discussions and negotiations, the boards of IPC and Max unanimously approved a definitive amalgamation agreement, a "merger of equals." IPC would be the surviving entity and would change its name to Max Capital Group Ltd. When the tax-free, stock-for-stock merger closes (expected to be in the third quarter of 2009), existing IPC shareholders would own 58 percent of the combined company, existing Max shareholders 42 percent.

The deal would be only the second significant mergers-and-acquisitions deal in the sector since 1999. IPC's offer values Max at about $912 million, slightly below its market value at the time and significantly below its book value. The price reflects the current environment, where the stability of an enlarged capital cushion and cost savings are trumps.

Under the agreement, Max CEO Becker and IPC Chairman Hammond would fill similar roles in the new company. IPC CEO Jim Bryce would take a senior nonexecutive role until December 31 and then retire from the company, as previously announced. A 12-man board, composed of one executive and 11 non-executive directors, is envisaged. Five of Max's independent directors, plus Becker, would sit on the new board.

The rating agencies agreed that the deal is essentially positive, but place IPC on watch.

March 31: Unexpectedly, Validus delivered what it calls a "binding offer" to the board of IPC for the amalgamation of Validus and IPC in an exchange of shares. Validus termed its offer "a superior proposal."

Based on closing market prices on March 30, the offer valued IPC shares at an 18 percent premium to IPC's closing stock price on March 30, 2009. At market close on April 30, 2009, however, this premium stood at 4 percent. While represented as binding, Validus' proposal is conditioned on regulatory and credit approvals and allows the Validus Board several outs.

Under IPC's agreement with Max, neither party is allowed to engage in discussions with other potential bidders. Becker said: "Combining two short-tailed property-catastrophe-oriented companies (i.e., IPC and Validus) would appear to do little for true shareholder diversification."

IPC "has become the darling of a bidding war," a Citigroup analyst reported.

April 2: Noonan wrote to IPC's board. "Max Capital has made a number of inaccurate statements and misleading claims designed to obfuscate the fundamental point that Validus is offering a higher value and better long term opportunity for IPC shareholders," he said.

Max wrote to IPC's board, saying Max "remains both steadfast in its commitment and excited to complete the amalgamation with IPC." In an interview, Becker asked: "Why would I sweeten an offer that's already the more reasonable offer?"

A.M. Best has not yet opined as to the ratings in the event of an IPC/Validus deal and has therefore left Validus' rating unchanged for the time being.

April 3: Becker explained: "We have a deal, and that deal requires both of us to put it to our shareholders for a vote. By virtue of our proxies, that can't take place until June. Only if that vote is negative can IPC negotiate with anyone else. No negotiations can take place until that vote."

April 7: "After careful consultation with management and financial and legal advisors," IPC's board unanimously reaffirmed its recommendation of the amalgamation agreement with Max. The IPC board delivered a letter to Validus informing it of the decision.

Separately, Max refuted claims made in Validus' letter of April 2.

April 9: Validus said it has filed preliminary proxy materials with the SEC, urging IPC shareholders to vote against the agreement with Max.

April 14: Noonan said that Validus will grow its operations whether or not its takeover of IPC is accepted by IPC's shareholders. "Validus can and will increase--with or without this deal," Noonan said.

April 15: IPC and Max announced that the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice have completed their review of the proposed amalgamation and have granted early termination of the Hart-Scott-Rodino waiting period.

April 16: Validus announced that it has filed preliminary proxy materials with the SEC in connection with a special meeting of shareholders of Validus to approve the issuance of Validus common shares in connection with its proposed acquisition of IPC.

April 28: Validus revealed it has filed legal proceedings in the Supreme Court of Bermuda against IPC and Max that challenge a $50 million termination fee if the IPC/Max deal is cancelled by either party, and the "no-talk" provision contained in Max and IPC's agreement.

April 29: Max said it intends to vigorously defend the agreement with IPC against Validus' "meritless" lawsuit.

April 30: Validus outlined a three-part plan to acquire IPC. Validus will solicit IPC shareholders to vote down the proposed amalgamation with Max; begin an exchange offer for all IPC common shares, which requires 90 percent participation by IPC shareholders to succeed; and petition the Supreme Court of Bermuda to approve a scheme of arrangement under Bermuda law, which requires the support of 75 percent of IPC shareholders to succeed.

IPC's board unanimously reaffirmed its belief that Validus' proposal is not a superior offer to the deal agreed with Max and noted that Validus' exchange offer will contain the same economic terms for IPC shareholders as the previous Validus proposal already rejected by IPC's board, which currently values IPC at about 82 percent of diluted book value.

The respective shareholders of IPC and Max are expected to vote on the IPC and Max amalgamation agreement in June. As of now, it is hard to say which way the voters will go.

Meanwhile, a Max/IPC transition team is already at work. Validus could have a hard time getting its bid going before Max closes the thing out.

May 4, 2009

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