April 8, 1998
Conseco Agrees to Acquire
Green Tree for $6.44 Billion
Deal Will Be an Exchange of Stock,
Cross-Selling Plays a Role in Deal
By JEFF BAILEY
Staff Reporter of THE WALL STREET JOURNAL
Conseco Inc., a major provider of life and health insurance, agreed to
acquire Green Tree Financial Corp., a subprime-market lender best
known for financing mobile-home purchases, in a stock swap valued at
$45.02 a share, or about $6.44 billion.
Though far smaller than Monday's announced merger of Citicorp and
Travelers Group Inc., the acquisition reflects the continued consolidation
of the financial-services industry. Conseco's move, like the
Citicorp-Travelers combination, also is based on the notion of
cross-selling, in which the merged companies can market a broader array
of services to each other's customers.
Conseco, based in Carmel, Ind., is a
major seller of annuities, cancer insurance
and supplemental Medicare coverage,
while Green Tree, based in St. Paul,
Minn., offers loans and other types of
financing to less-credit-worthy customers,
often at higher interest rates. The
combination would give Conseco a
customer base of 11 million people.
Conseco Shares Plummet
But unlike the reaction to the
Citicorp-Travelers merger, investors were
cool to Conseco's planned acquisition.
Conseco shares dropped $8.625, or
15%, to $49.125 in New York Stock Exchange composite trading.
Meanwhile, Green Tree shares, battered in recent months, jumped
$9.875, or 34%, to $38.875 on the Big Board. The plunge in Conseco's
share price reduced the current value of the deal by $1.13 billion.
Conseco, however, is betting that
cross-selling will succeed with Green Tree's
working-class consumers, who tend to be less
sophisticated and do a lot less shopping around for the best price. Upscale
consumers, such as those served by Travelers' securities operation and
Citicorp's private-banking business, on the other hand, tend to shop
widely for price and quality of service and are more comfortable doing
business with several financial firms.
Under an agreement approved by both companies' boards, Conseco
would issue 0.9165 common share for each of Green Tree's 134 million
shares outstanding, as well as for each of about nine million Green Tree
options.
Unusual Companies
The acquisition brings together two of the most unusual and highflying
financial firms of recent years, and their well-compensated chief executive
officers. Stephen C. Hilbert, a onetime door-to-door encyclopedia
salesman, founded Conseco in Indianapolis and built it through a string of
ever-larger acquisitions. By slashing costs of acquired insurance
companies, he made Conseco one of the best-performing stocks in recent
years.
Lawrence M. Coss founded Green Tree and made it the king of the
little-loved business of making mobile-home loans. He received
widespread attention for his compensation contract, which in 1996 paid
him a bonus of $102.4 million, later reduced by $23 million when the
company restated its results.
Under the agreement, Mr. Coss would continue to head Green Tree as a
Conseco subsidiary, with the only major change being that the companies
would try to sell financial services to each other's customers. Conseco has
nine million policy holders and Green Tree has two million borrowers.
"This is not an expense story," Mr. Hilbert said. "This is a growth story."
The combined companies are expecting just $40 million a year in cost
cuts. Mr. Hilbert expects the acquisition to immediately increase
Conseco's per-share earnings.
Criticism of Lending
Kathleen Keest, an assistant attorney general in Iowa, expressed concern
at the idea of aggressive cross-selling of financial services to the working
class. Less-sophisticated consumers are often talked into accepting
expensive insurance policies along with a loan, she said, including so-called
credit-life policies that pay off the loan, but offer the consumer little or no
other benefit in the event of death.
Conseco sells cancer, heart-attack and stroke insurance. "These cancer
policies and dread-disease policies are worth nothing," Ms. Keest said,
adding that consumers are better off with simple major-medical coverage
rather than buying coverage piecemeal.
A Conseco spokesman said the company's insurance products fill
consumer needs and are only sold to those who want them.
Mr. Hilbert has long been frustrated by the lack of respect he feels
Conseco gets from investors and others, and those feelings spilled out
Tuesday during a conference call with reporters. "Wall Street sometimes
takes a day or two to be enlightened," he said. Noting the positive reaction
to the Citicorp-Travelers merger, he added: "Because they were
household names, it was supposed to be a wonderful deal."
"People absolutely overlook" Green Tree, Mr. Hilbert said, as a major
force in the consumer-finance business. That, of course, is because the
company has largely been a mobile-home lender, though more recently it
has branched out into home-equity loans and credit cards.
Consumers Get Wise
Across the industry of lending to working-class consumers, however,
lenders are suffering as customers have begun to wise up to some of the
very high interest rates and fees they are being charged. This has led to an
unexpected wave of prepayments for mobile-home, home-equity and
credit-card loans, reducing profits in the business. Green Tree took $390
million in pretax charges to cover the cost of higher-than-expected
prepayments that occurred in 1996 and 1997. That forced Mr. Coss to
give back some of his 1996 compensation.
The problems also drove up Green Tree's funding costs, pinching its profit.
And, using less-aggressive accounting, the company expects to report
lower 1998 earnings than previously estimated.
Conseco, however, expects to reduce Green Tree's cost of funds by
between 0.2 and 0.3 percentage point.
Mr. Hilbert said he isn't relying on the benefits of cross-selling to make the
acquisition additive to per-share earnings. However, he said, if just 1% of
Conseco's policy holders, or 90,000 consumers, each took out a $36,000
mobile-home loan from Green Tree, that would add $250 million of pretax
profit to the combined companies. "This is one of the finest, if not the
finest, deals done in the financial-services industry," he said, adding that he
expects investor sentiment to turn around on the deal.
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