Manulife financial and the john Hancock acquisition.

Lento, Camillo ; Gregoire, Philippe ; Poulin, Bryan 等

CASE DESCRIPTION

This case mainly deals with the opportunity for Manulife Financial to acquire the legendary John Hancock Financial Services, Inc. Students must consider both financial and non-financial aspects of the acquisition decision. Secondary aspects include a host of other financial and strategic issues facing Manulife Financial. The case would be relevant for either a senior undergraduate or graduate course in strategy or financial management as it requires analysis and support drawing from both disciplines. The case is designed to be taught in one to two class hours and is expected to require approximately five hours of outside preparation time. Students need to be familiar with financial management concepts and strategic analysis and formulation.

CASE SYNOPSIS

In 2003 Dominic D'Alessandro is facing his most challenging time since becoming CEO of Manulife almost ten years prior. D'Alessandro must not only decide where to invest Manulife's large cash reserve now that a competitor, Great West Life, became the successful bidder for Canada Life Financial, he must also look at the strategic direction he is to set as consolidation in the financial services industry comes to a close. There are many investment alternatives, including the relatively safe bond market; but, more risky and rewarding options may be required if D'Alessandro wants to continue Manulife's legacy of exceptional financial performance.

Aside from the investment and related strategic decisions, D'Alessandro must contend with an appreciating Canadian dollar, the increased re-insurance risk made evident by the events of September 11th, 2001 and the emergence of the Sudden Acute Respiratory Syndrome (SARS) in the Asian continent. In short, D'Alessandro must pursue an investment course that is strategic, and formulate and implement a plan that will ensure the future profitability and viability of Manulife Financial in the short and long run.

INTRODUCTION

June 2003. It has been almost ten years since Dominic D'Alessandro was appointed President and CEO of Manulife Financial. There have been many changes at Manulife Financial during his tenure and today Dominic D'Alessandro is currently facing a different future with room to maneuver. Manulife has a large cash reserve accumulated to bid for Canada Life Financial. D'Alessandro must decide where to invest the cash now that a competitor, Great West Life, won the bid. There are many options, including the relatively safe bond market; however, a more rewarding option is required if D'Alessandro wants to continue Manulife's exceptional financial performance. The three most viable alternatives are: 1) attempt to takeover another insurance company or 2) lobby the government to ease restrictions and merge with one of the big five Canadian banks, or 3) formulate a new strategy since the consolidation period is coming to an end.

Whatever course is chosen, D'Alessandro must devise a plan to face an apparently less certain world, now that the September 11th, 2001 attacks have occurred. The risk of terrorism is much larger than originally thought and the war in Iraq now has investors seeking greater security. Also, the Sudden Acute Respiratory Syndrome (SARS) scare in Asia, although apparently in retreat, reminds health officials and insurers alike that plagues and pandemics are not beyond the realm of possibility in this new century. Finally, the rapid appreciation of the Canadian dollar is expected to hurt Manulife's profitability since Canadian services will now be relatively more expensive internationally and overseas profits will be smaller when converted into the Canadian currency. These circumstances make it difficult for D'Alessandro to achieve Manulife's current objectives of earning a return of 16 percent on equity and increasing earnings per share by 15 percent per annum. D'Alessandro must convince investors that Manulife will continue as a superior performer in the face of these new market realities.

HISTORY AND DEVELOPMENT OF MANULIFE FINANCIAL

The Manufacturers Life Insurance Company, or simply Manulife, has a rich history steeped with Canadian culture. The company was incorporated in 1887 with the former Prime Minister of Canada (Canada's first Prime Minister), Sir John A. Macdonald, elected as Manulife's first President. By 1897, ten years after inception, Manulife had expanded into Asia and planned to and did enter the U.S. market a few years later. Its head office in Toronto, Ontario Canada is still presently the Company's global headquarters. Throughout its history, Manulife was known as a company that anticipated change and, for example, it was the first insurance company in Canada to offer low-policy rates to non-smokers and was the first insurance company in Canada to adopt mainframe computer technology with the installation of the IBM 650 series computers in the 1960s. More recently, Manulife was the first Canadian insurance company to open a bank with the launch of The Manulife Bank of Canada in 1993.

Like all insurance companies, Manulife generates much of its cash from insurance premiums that are invested in mostly long-term instruments at rates that ensure a surplus after policyholder's claims are paid out. In addition to providing financial protection, Manulife offers wealth management products in Canada, the United States and Asia, with customers in 15 countries and territories worldwide. The company's offerings include individual life insurance, group life and health insurance, pension products, annuities and mutual funds to individual and group customers. Manulife is also active in reinsurance, asset management and investments. The vision is expressed as follows:

 "Our vision is to be the most professional life insurance company
 in the world: providing the very best financial protection and
 investment management services tailored to customers in every
 market where we do business."

Manulife has a set of written values that are made more memorable by the acronym PRIDE. The PRIDE acronym is used by Manulife Financial to guide all of their actions, from strategic planning to day-to-day decision-making, to the manner in which customers and other stakeholders are treated. PRIDE stands for:

* Professionalism: We will be recognized as having professional standards. Our employees and agents will possess superior knowledge and skill, for the benefit of our customers.

* Real value to our customers: We are here to satisfy our customers. By providing the highest quality of products, services, advice, and sustainable value, we will ensure our customers receive excellent solutions to meet their individual needs.

* Integrity: All of our dealings are characterized by the highest levels of honesty and fairness. We develop trust by maintaining the highest ethical practices.

* Demonstrated Financial Strength: Our Customers depend on us to be here in the future to meet our financial promises. We earn this faith by maintaining uncompromised claims paying ability, a healthy earnings stream, and superior investment performance results, consistent with a prudent investment management philosophy.

* Employer of choice: Our employees will determine our future success. In order to attract and retain the best and brightest employees, we will invest in the development of our human resources and reward superior performance.

Manulife experienced significant expansion during the 1980s. Growth in the United States was led by two key acquisitions--the National Liberty Life Insurance Company of America and the Maine Fidelity Life Insurance Company. Manulife began a demutualization process in 1993 whereby shares were sold to the public and began trading on The Toronto Stock Exchange (TSE) and the New York Stock Exchange (NYSE) under the ticker 'MFC'. Manulife used proceeds from debt and equity issues to acquire other insurance companies and continue its acquisitions into the 21st century. A few of Manulife's recent acquisitions include Commercial Union's Canadian life insurance business, Zurich Life Insurance Company of Canada, Daihyaku Mutual, the in-force life insurance business of MetLife Insurance Company and CIGNA's agency business. These have proven worthwhile as consolidation in the financial services industry led, at least at first, to greater scale and scope efficiencies. Today, Manulife is a firm with operations spanning the globe, with divisions set up by geographic locations as part of its globalization strategy. The five divisions are:

* United States Division (34% of Net Income): provides insurance and wealth management products to select markets. It is the largest contributor of premium revenue and net income.

* Canadian Division (27% of Net Income): provides life insurance and wealth management products including banking products, annuities, and group pension products.

* Asian Division (19% of Net Income): Manulife has operated in Asia since 1897, beginning in Hong Kong and the Philippines, and recently in Shanghai. It provides individual and employee life and health insurance, and investment products.

* Japan Division (8% of Net Income): The Japan Division operates in one of the largest and underserved insurance markets in the world. It focuses on delivering universal life insurance to middle and upper-income individuals and small to medium sized business.

* Reinsurance Division (13% of Net Income): The Reinsurance Division provides risk management solutions, specializing in life retrocession.

These five divisions have experienced rapid change and growth, as reported in Canada's National Post Newspaper: "When Dominic D'Alessandro came to Manulife, it was a staid, oldschool insurer. Today, he presides over an innovative financial-services giant that rivals the banks in size, services and global ambition" (2002 and pp. 52--53). After joining Manulife, D'Alessandro continued to endorse and promote service to the community. He is, for instance, Campaign Chair for the Salvation Army, he sat as Chair for the Greater Toronto United Way Campaign and he served as Co-chairman of the Corporate Fund for Breast Cancer Research.

Dominic D'Alessandro

Dominic D'Alessandro has been President and Chief Executive Officer of Manulife since January 1994 and has guided the Company to nine consecutive years of exceptional financial performance, as revenues and net income have quintupled. During his tenure, D'Alessandro led the company's successful demutualization, was named Canada's Outstanding CEO of the Year 2002, and received the CEO Award of Excellence in Public Relations in 2001.

D'Alessandro has an extensive and varied background, mainly in finance and financial services. He graduated with a Bachelor of Science degree in Physics and Mathematics from Loyola College, became a chartered accountant in 1971, and he was awarded an Honourary Doctorate from Concordia University in 1999. From 1968 to 1975, he was employed with the accounting firm Coopers & Lybrand. In 1975, D'Alessandro joined Genstar Ltd. where he worked as Director of Finance and General Manager, and later as Vice President of Genstar's Materials and Construction Group. D'Alessandro moved to Canada's largest bank, the Royal Bank of Canada, in 1981 where he held a number of positions including Controller and Executive Vice President of Finance.

OVERVIEW OF INSURANCE INDUSTRY BUSINESS MODEL

Essentially, an insurance company collects a premium from a client in return for providing financial assistance in the case of a catastrophe. Determining the price of the premium is a complex process performed by actuaries. The mathematical principal of expected value is used to calculate the premium whereby the probability of each future scenario is multiplied by the total cash payout under each scenario (Saunders and Thomas 2001).

Since there is a timing difference between when the premium is collected (present day) and when the potential cash payment occurs (future date), the time-value of money must be taken into account when calculating the price of a premium. As such, actuaries must make assumptions regarding the rates of return earned on the premiums. Essentially, the price of the premium is set to equal the present value of the probable future cash outflow plus the administration costs.

The business model and nature of the insurance industry makes it evident that returns realized on the investment of premiums is critical to the financial success of company. If the expected return used to calculate the price of the premium is greater than the return actually realized, the transaction will not be profitable and the insurance company will lose money. On the other hand, the company should experience high levels of profitability if the returns realized from the many policies are greater than that expected returns.

Insurance companies tend to invest their premiums in a balanced portfolio of stocks, bonds, and long-term investments in subsidiaries. Risk management is essential during the investment process because excess risk could eventually bring insolvency.

RECENT FINANCIAL PERFORMANCE

Manulife has generated a 25 per cent compound annual growth rate in earnings per share (EPS) over the past nine years and earned record profits in 2002. However, Manulife's financial performance has slipped in 2003. For example, in the first quarter of 2003, the U.S. division contributed $107 million in profit, down $11 million from a year earlier, while the Canadian division profit was $94-million, up by only $1 million. The Asian division accounted for $58 million in profit ($53 million in the prior year) and the Japanese operations saw profits slip to $25 million from $30 million. Reinsurance reported a profit of $57 million, up from $50 million. The first quarter annualized return on shareholders' equity was 15.8 per cent compared to 16.3 per cent for the same period last year, while EPS, which includes a one-time charge of $15 million related to the abortive takeover bid for Canada Life Financial, increased four per cent to $0.73 from the $0.70 First quarter results did not meet financial objectives and D'Alessandro responded: "I am pleased that we were able to perform so well this quarter given the extremely challenging conditions " (Manulife 2003a).

As mentioned earlier, Manulife's profitability is dependent upon underwriting and investing activities. Underwriting includes the sale of insurance policies and annuities, and reinsurance activities. A growth trend in premium revenue is the greatest indication of future growth in underwriting activities. Investing activities manage the company's revenues to ensure that the future claims of policyholders can be paid. Interest rates play a large role in the profitability of investing activities. When interest rates are falling, growth in net investment income will be low, as yields on insurers' bond portfolios slide. At the same time, falling interest rates increase the value of a portfolio's underlying assets (fixed-income securities) that also produce the investment income. The 2002 key ratios indicate that Manulife has been performing exceptionally well in underwriting and investing activities (see the following Table 1 for key financial ratios).

The Return on Assets (net income divided by average assets), Return on Equity (net income divided by equity) and Return on Revenue (net income divided by revenue) all indicate the performance of Manulife in underwriting, while the net investment yield indicate how Manulife is doing in investment compared to its major competitors.

THE LIFE INSURANCE INDUSTRY

Manulife's main source of revenue (premiums), include premiums from Term-Life, Universal Life, and Whole Life. In 2002, the Canadian division experienced an increase in premiums, while the U.S. division has seen a decrease. The recent decrease in the U.S. division is puzzling considering the aging baby boomers (28% of the U.S. population). When baby boomers plan for retirement, they do so with a low level of faith in the social security system. As a result, demand for life insurance products should be expected to increase as many Americans turn to life insurers to provide death-benefits and savings-oriented life insurance products and annuities. The most likely cause is that the recent downturn in the economy may be causing many in the U.S. to delay their insurance and savings needs at this time.

The Asian division may suffer a decrease in premium revenues for different reasons. For example, the Sudden Acute Respiratory Syndrome or SARS outbreak has become a major factor for Manulife in Hong Kong and parts of mainland China. SARS has the potential effect to increase Manulife's expenses, as claims due to sickness and mortality may increase. Sales are also very slow in Hong Kong because Manulife agents are worried about meeting clients face to face and vice-versa.

Manulife is trying to bridge the sales gap in Hong Kong by using the telephone and direct mail, but these do not have the same sales impact as face to face selling. Sales activities have been hit hard in Manulife's emerging operations in mainland China, where SARS is believed to have originated. Thus far, its Hong Kong operation has received two or three death claims and one for hospital benefits. Although the disease seems to be under control right now, Manulife must be prepared for new waves of SARS contaminations. SARS is also having a negative effect on the Asian economy.

Manulife Taiwan has made changes to their operations in the brink of SARS. A series of new initiatives have been developed to ensure that its customers are adequately covered against any financial costs that result from the treatment of SARS. Following an increase in public concern after the government took preventive measures to control the spread of the disease, Manulife is offering SARS-related insurance coverage. Services offered are:

1. The daily hospital income benefit from Manulife medical riders will be doubled for hospital confinement as a result of SARS related cases.

2. When a policyholder recovers from SARS and is quarantined at home, 50 per cent of the daily hospital income will continue to be payable during the 10 day quarantine period.

3. For death within 30 days after the confirmation of SARS, an extra death benefit of 100 per cent of the sum assured under the life policies, subject to a maximum additional benefit of $100,000, will become payable.

4. Manulife Taiwan also confirmed that all health insurance policies include statutory infectious diseases. If policyholders have the misfortune of contracting SARS, they will be eligible to claim for medical expenses as per the standard provisions. Manulife Taiwan will be notifying all their policyholders by mail about the changes.

The Taiwan Government has been aggressively taking action to reduce the risk of contracting SARS and Manulife has been doing contingency planning, trying to make sure that enough staff will be equipped with secure communication lines to work from home or from off-site locations if hit by large-scale employee quarantines. Similar contingency planning is also underway in Canada, following Toronto's experience with several SARS related deaths.

INVESTMENTS

Manulife Investment division manages assets for the Company's insurance and wealth management businesses and for external third party clients. Life insurance premiums are invested to ensure that adequate funds are available to pay out claims and liabilities on insurance plans. The Investment operations are comprised of: securities management and asset origination.

The Securities Management Group manages portfolios of assets including bonds, stocks and short-term investments. In addition to managing investments for its own policyholders, Manulife has built considerable expertise providing investment counseling services to third party clientele. Through its investment subsidiaries, Elliott & Page and Seamark, Manulife ranks amongst the largest institutional investment counselors in Canada. Expanding third party management services has been a key focus for the future growth of the Company.

The Asset Origination Group focuses on creating assets to achieve superior returns and provide a competitive advantage to the Company. The group has five major operations: Real Estate, Mortgage Operations, Regional Power, Manulife Capital and NAL Resource Management Limited. Manulife College Savings is an example of an original asset generation. Manulife College Savings is accessible only in the United States and offers professional investment selection to help maximize investment opportunities, while effectively managing risk and minimizing taxes. The U.S. Division has focused heavily on this market.

A successful example of the Asset Origination Group is the Manulife Bank of Canada, a wholly owned subsidiary that was the first federally regulated bank opened by a life insurance company in Canada. Since there is no brick and mortar building, clients are encouraged to do most of their banking activities over the telephone or internet. Manulife Bank offers services and fees that are similar to the large Canadian banks. In November 2002, D'Alessandro said that Manulife Bank is "growing nicely, and primarily its activity is to lend money to our insurance clients to facilitate sales. We have a lot of clients who have a lot of money in an insurance policy and might have a need for X dollars to do something (buy a home). We can usually accommodate those customers" (National Post, 2002, pp. 58).

Manulife Bank recently increased its interest rate to 3.05 per cent, an increase of 55 basis points, for its Advantage Account (this rate is slightly higher than other internet based banks, including ING Direct who offers 3 per cent and much higher than the large Canadian banks who offer 0.5 per cent to 1 per cent on regular savings accounts). The Advantage Account allows people to earn interest on their savings with easy access to their money. "More and more, Canadians are looking at the interest they're earning, or rather, not earning on their bank accounts," said D'Alessandro, adding "Manulife Bank is committed to remaining at the forefront of this market by offering the best combination of high rates, easy access, and low fees" (Manulife 2003b). Manulife is not the only company offering high-interest bank accounts, as there is a growing number in the market. With many choices, comes greater public confusion.

INVESTMENT AND ACQUISITION OPTIONS

In the wake of all the uncertainties and emerging issues, Manulife still has to ensure that their premiums are invested in a vehicle that provides superior returns and meets financial objectives. On December 27, 2002, Manulife attempted to acquire all the outstanding common shares of Canada Life Financial to create Canada's largest insurance company. Canada Life is one of Canada's five largest insurance companies, providing services to more than 10 million policyholders. Clients are from Canada, the U.S., the U.K., and Ireland. Canada Life also provides reinsurance products in the life and financial areas and offers property insurance through Kanetix, a subsidiary. The transaction was valued at more than $6.4 billion. Under the terms of the offer, Canada Life's common shareholders could choose to receive either $40 in cash or 1.055 Manulife common shares for each Canada Life common share.

Manulife's plans were foiled when Great-West Lifeco made a takeover bid of $7.3-billion or $44.23 per share on February 17, 2003. There is approximately a $1-billion difference between Great-West's cash-and-share offer and Manulife's. Even before Great West made an offer, Manulife failed to get Canada Life's board of directors and management on its side from the start. To help persuade Great West to come in as a white knight, Canada Life agreed to give the company the right to match any competing offer and to pay it a break fee of $287-million or about $1.75 a share. Although Great-West Lifeco's stock price has recently risen dramatically after the acquisition, Manulife is sitting on a valuable consolation prize: 14.7 million Canada Life shares (9.1 per cent of the company) worth more than $650-million.

After failing to acquire Canada Life Financial, D'Alessandro still has a few viable acquisition/merger targets, in a market that's rapidly winding down. A potential target for acquisition is Boston's John Hancock Financial. John Hancock's CEO made it clear that he fully expects more takeovers and mergers, including cross-border deals. The second candidate is the Canadian Imperial Bank of Commerce. These potential mergers, however, have to be carefully analyzed before being pursued because they are risky. Having been burned by the loss of Canada Life to Great-West, Manulife will want to make sure its next major transaction is nailed down solidly before it becomes publicly known. If the potential acquisitions are overly risky, D'Alessandro still has the option of the much safer bond market.

D'Alessandro and the Manulife management are aware of the risks inherent in purchasing another company. Business literature presents some conclusions regarding mergers and acquisitions. There are many difficulties of implementing a successful value added acquisition strategy, as postacquisition difficulties arise because managers of the acquiring company did not deeply understand the target company at the time of acquisition, or that the acquirer imposed an inappropriate organizational design on the target as part of the post-acquisition process. Also, inappropriate management incentives that exist at both the top management and divisional level led to unsuccessful mergers. Acquiring returns are greater in acquisitions in which the acquirer and the target are in the same line of business. The acquirer should have a deep understanding of the targets business and industry before negotiations (Kaplan, S. N., Mitchell, M. L. and Wruck, K. H 1997). It is also evident that the difference between a successful and unsuccessful acquisition is directly related to the post-acquisition integration strategy (Singh H. and Zollo M. 1998).

John Hancock Financial Services

John Hancock Financial Services is one of the U.S.A's leading financial services companies, providing a broad array of insurance and investment products and services to retail and institutional customers, primarily in North America with revenues over $8 billion (Table 2). The Company operates its business in five segments. Two segments serve primarily retail customers, including the protection segment and the asset-gathering segment, and two segments serve institutional customers, including the guaranteed and structured financial products segment and the investment management segment. The fifth segment is the corporate and other segment. The CEO of Hancock Financial has indirectly confirmed that he sees Manulife and Sun Life Financial Services of Canada Inc. as potentially suitable merger partners.

Canadian Imperial Bank of Commerce

Canadian Imperial Bank of Commerce (CIBC) is one of the largest banks in Canada, with a presence in the United States. CIBC has consistently generated profits (Table 3) and a combination with Manulife would provide for a host of potential synergies, cost-savings and cross-sales.

However, cross-pillar mergers are currently not allowed in Canada. Many CEO's of large banks believe these maybe likely in the future by arguing that the large number of financial service companies makes the affects of a merger on competition negligible. On January 14th, 2003, Manulife attempted to buy CIBC in a move that would have created an international financial service giant, but then-Finance Minister John Manley cancelled the deal. Mr. Manley derailed the merger plan by declining to void the federal policy that prohibits the big banks from merging with either of the two biggest insurers, Manulife or Sun Life Financial. Analysts believe that the Manulife-CIBC deal would have gone through had the government not been confronted with another merger proposal (Scotiabank and Bank of Montreal). To this effect, it may be worthwhile for D'Alessandro to lobby the government in order to lift the restrictions preventing banks from selling insurance through their branches and allowing for cross-pillar mergers.

The blockbuster deal would have been the first of its kind in Canada as Manulife would have become a financial services company that could offer banking, brokerage, insurance and wealth-management services and products around the world. CIBC is the natural target. Royal Bank and Toronto-Dominion bank are too big, and neither would have wanted to become the lesser partner in a merger. Bank of Nova Scotia and Bank of Montreal were engaged in their own merger talks and may be waiting for restrictions to ease. That left CIBC, which had two key advantages. The first was that CIBC's share price, thanks to lending losses in the Enron debacle and the losses in its ailing Amicus electronic bank system in the United States, had fallen from about $57 to the mid-$40s, making it a less expensive target. The second was that CIBC has an extensive retail and wealth management network in Canada. Had the deal gone through, Manulife and CIBC together would have been one of the continent's most powerful financial services names with more than 70,000 employees, 16.5-million policy holders and customers, and annual revenue of about $33- billion.

Bond Market

Investing in bond market is a lot less risky that the other two alternatives, but bonds do not provide the same potential for growth in earnings. The current yield on Canadian and U.S. treasury bonds is revealed in Table 4. U.S. Treasury's have fallen hard over the past three years, pushing the yield on the 10-year note from 6.79 per cent in early 2000 to a recent 45-year low of 3.11 per cent. From 1970 to 1999, the average return on long term corporate bonds has been 7.64 per cent with a standard deviation of 10.57 per cent, while treasury bills have returned 6.04 per cent with a standard deviation of 4.04 per cent. Currently, Manulife's bond portfolio is diversified across many different industries, with the highest percentage invested in the government sector.

REINSURANCE DIVISION

Reinsurance refers to insurance purchased by an insurance company to cover all or part of certain risks on insurance policies issued by that company; retrocession is a form of reinsurance involving the assumption of risk from other reinsures. A dramatic change occurred to the Reinsurance operations on September 11th 2001, when terrorism risk appeared to be more serious than previously thought. The Reinsurance Division incurred a $145 million expense for anticipated claims in 2001, and net income fell to $48 million (Table 5).

The risk of terrorism involves prospective losses of potentially high severity and unknown frequency, which makes risk quantification very difficult. Terrorism causes potential problems because it reaches beyond first-party property coverage to involve other coverage's (such as workers compensation, liability, and business interruption) that are also difficult to quantify. Since the attacks, reinsurance premiums for property and casualty have nearly doubled, thus increasing Manulife's risk of a loss in the event of another terrorist attack. Claims resulting from the September 11th attacks were recorded as a non-recurring expense in Manulife's statement of operations. However, the recent war in between the U.S. and Iraq may have increased the probability of future terrorist attacks, thus increasing the likelihood of similar losses in the future.

Warren Buffett, of Berkshire Hathaway, said in an interview that insurers and reinsurers were foolish for not pricing for man-made megacats [mega catastrophes] before September 11th. "In effect, we and the rest of the industry, included coverage for terrorist acts in policies covering other risks--and received no additional premium for doing so. That was a huge mistake, and one that I, myself, allowed. Had the attack on New York been nuclear, it is likely that most of the U.S. insurance industry--as well as reinsurers worldwide--would have been destroyed" (Berkshire Hathaway 2001).

RISING CANADIAN DOLLAR

On May 20th, 2003, the Canadian dollar climbed above 74 cents US, the highest it has been since the autumn of 1997. Economists believe that the Canadian dollar is rising because of falling interest rates in Europe, New Zealand, Sweden and possibly the U.S., combined with a lagging U.S. dollar. In general, researchers claim that once the exchange rate starts to move, its virtually impossible to predict where it will find its next equilibrium. Regardless of which direction they are moving, exchange rates typically overshoot their fundamentals. The belief at Export Development Canada (EDC) is that as the world economy gradually returns to normal during 2003 and into 2004, the Canadian dollar will slowly make its way back to the US 70 cent level, possibly a little higher. For a long time the EDC has been describing the final destination of the Canadian dollar as being somewhere around 70 to 71 U.S. cents. That landing zone is based on the relative productivity and competitiveness of Canada's producers, and is predicated on a number of assumptions, including a return to economic growth in most countries and a rebound in commodity prices and interest rates to pre--slowdown levels.

Manulife's profits are going to be negatively affected from the recent resurgence of the Canadian dollar value against the U.S. dollar. Analysts predict that Manulife's profits could fall by as much as 9 per cent in 2004 ($129 million) if the dollar remains at its current level of 73.28 cents relative to the U.S. dollar. Estimates are based on projected profits from Manulife's foreign operations that have to be converted into Canadian dollars for accounting purposes. Manulife doesn't hide the fact that "the Company may be exposed to losses resulting from adverse movements in foreign exchange rates due to the fact that it manages operations in many currencies and reports financial results in Canadian dollars" (Manulife 2002).

Canadian insurers will be at a distinct disadvantage compared to their U.S. counterparts in terms of earnings growth over the next year, or until the Canadian dollar eases. Manulife has a policy of reinvesting its U.S. profit in the United States, so it technically does not lose money on the currency conversion, however, it could affect the company on an accounting basis, since Manulife is required to report its results in Canadian dollars. The effects of the appreciating Canadian dollar are already visible. In the first quarter of 2003, premiums and deposits were up four per cent to $7.9 billion, but excluding the impact of the dollar, the growth rate would have been eight per cent ($8.2 billion). Acquisitions could also help to ameliorate any drop in profit because steep rises in the Canadian dollar this year has made it more affordable for Manulife to buy a U.S. insurer.

STRATEGIES FOR THE FUTURE

As Dominic D'Alessandro sits in his office in late June 2003, he knows that is was time to make decisive decisions regarding the future of Manulife Financial. The current market conditions and uncertainties required a thorough analysis of all relevant external and internal factors, assessment of feasible options, and formulation of a renewed strategy that is accompanied by an equally compelling implementation plan. The analysis, formulation and implementation of a plan is required to address the issues facing Manulife as well as to set a new direction for the company now that industry consolidation is coming to an end. Many questions need to be answered including these three major groups of questions:

1. Where should the large cash reserves be invested? What is the feasibility of Manulife acquiring John Hancock Financial, or merging with the Canadian Imperial Bank of Commerce? Would the safer bond market be the best place to invest the money?

2. If further acquisitions prove the best option, how would Manulife Financial handle the post-acquisition strategy to ensure that Manulife adds value in its offerings in different markets over the long term?

3. What, if anything, should be done with respect to the environmental factors such as appreciation Canadian dollar, the increased risk of SARS and other potential pandemics?

All of these circumstances will make it difficult to achieve Manulife's current objectives of earning a return of 16 percent on equity and increasing earnings per share by 15 percent per annum. D'Alessandro must determine how he can convince investors and shareholders that Manulife will continue as a superior performer in the face of these difficulties. Finally, there is the nagging suspicion that much of Manulife's success is owed to the aggressive acquisition spree that D'Alessandro engineered over the decade past. What next must be done to ensure a bright future for Manulife in the next decade, assuming it will not include many more acquisitions?

REFERENCES

Berkshire Hathaway (2001).Letter to the Berkshire Hathaway Shareholders. Retrieved on November 9, 2001 from http://www.berkshirehathaway.com/qtrly/web1101.html

Kaplan, S. N., M.L. Mitchell, and K.H. Wruck (1999). A Clinical Exploration of Value Creation and Destruction in Acquisitions: Organizational Design, Incentives, and Internal Capital Markets. NBER Working Paper No. W5999.

Manulife (2002). Manulife Financial Annual Report. Retrieved on March 31m 2004, from http://www.manulife.com/corporate/corporate2.nsf/LookupFiles/ Downloadable File2002_Annual_Report/$File/2002_Annual_Report.pdf

Manulife (2003a). Manulife Press Release Retrieved on April 23rd, 2003 from http:// www.manulife.com/corporate/corporate2.nsf/Public/corporate042403.html

Manulife (2003b). Manulife Press Release Retrieved on April 17th, 2003 from http://www.manuvie.com/corporate/corporate2.nsf/Public/canada041703.html

National Post (2002, November). Canada's CEO of the Year: Manulife's Dominic D'Alessandro has Global Ambitions. National Post Business.

Saunders, A. and H. Thomas (2001). Financial Institutions Management: Second Canadian Edition. Toronto: McGraw- Hill Ryerson.

Singh, H. and M. Zollo (1998). Creating Value in Post-Acquisition Integration Processes. Wharton Working Paper No. 93-33. Retrieved on April 25th, 2004 from http://fic.wharton.upenn.edu/fic/papers/98/9833.pdf

Camillo Lento, Lakehead University

Philippe Gregoire, Lakehead University

Bryan Poulin, Lakehead University

Table 1: Key Financial Ratios

 Net
 Return on Return on Return on Investment
 Assets Equity Revenue Yield

Manulife 1.69% 15.66% 8.29% 13.63%
Industry Average 0.49% N/A 2.41% 7.02%
Typical Range 0.4% - 0.9% 10% - 15% 2% - 5% 4% - 10%

Table 2--John Hancock Financial

(U.S $ in 000's) 2002 2001 2000

Total Revenue $8,455,100 $9,109,000 $7,598,100
Net Income $499,500 $611,500 $838,900
EPS $1.76 $2.02 $2.67

Table 3--CIBC Key Financial Highlights

(CAD $ in 000's) 2002 2001 2000

Assets $273,293 $287,474 $250,331
Total Revenue $9,541 $10,062 $10,859
Net Income $653 $1,685 $2,060
EPS $1.35 $4.13 $4.9

Table 4--Current Bond Yields

U.S. Treasury Bond Yield

Bond Yield

2 Yr 1.30%
5 Yr 2.43%
10 Yr 3.55%
30 Yr 4.59%

CAD Treasury Bond Yield

Bond Yield

1 - 3 Years 3.07%
3 - 5 Years 3.62%
5 - 10 Years 4.28%
Over 10 Years 5.08%

Table 5--Summary of Statement of Operations--For the
Year-Ended December 31, 2002

(CAD $ in millions) 2002 2001 2000

Revenue
Premium Income $1,063 $791 $768
Investment Income 226 231 194
Other Revenue 43 38 22
 Total Revenue 1,332 1,060 984
Expenses
Policy Benefits 1,003 963 762
Other Expenses 91 95 90
 Total Policy Expenses 1,094 1,058 852
Income Taxes 54 (46) 24
Net Income $184 $48 $108