Conseco Inc.'s decision to sell its consumer finance unit after two years of trying to build it up is a cautionary tale for architects of financial supermarkets.
The Carmel, Ind., insurance giant said last week that it had put its Conseco Finance Corp. subsidiary, formerly Green Tree Financial Corp., on the block. It cited the effect that buying the Minneapolis lender has had on its stock price.
Conseco shares have fallen 80% since the deal was announced in April 1998. Late Friday they were trading at $11.4375, off 16% from Thursday's close.
"The pain threshold for shareholders just got to be intolerable," said Conseco's chairman, Stephen C. Hilbert, in a conference call Friday morning.
When the acquisition deal was announced Mr. Hilbert promised that Conseco would become "a financial services juggernaut." The company intended to cross-sell its ' insurance products to Green Tree's loan customers and vice versa. Both companies focused on less-affluent consumers.
But building a one-stop shop for financial services is not easy, points out Joanne Gordon, an analyst at Warburg Dillon Read LLC.
"The only successful example we have to date is Citigroup, and the jury is still out on whether that's ultimately going to be successful," Ms. Gordon said. "It is very difficult to convince investors that it's a viable strategy," she said, and Conseco's problem s illustrate that difficulty.
But another analyst who follows Conseco said its decision to throw in the towel should not dash others' hopes of building a financial supermarket. Rather, said this observer, who spoke on condition of anonymity, Conseco erred in its choice of vehicle: a subprime lender that was heavily reliant on securitization.
On the conference call, Mr. Hilbert said Conseco Finance has been "hitting or exceeding all operating targets."
"In spite of that, we have been unable to generate the level of shareholder value we believe was warranted when we closed the transaction."
He said Conseco was hoping to get around $4.5 billion for the unit, a figure based on the book value of $2.2 billion plus $2.5 billion of loans the parent had made to the subsidiary. Conseco paid $6.5 billion for Green Tree two years ago.
From the outset, investors were skeptical about the deal for several reasons. For one thing, Green Tree's main business is making loans secured by manufactured homes. The borrowers of such loans are considered, fairly or not, risky credits.
Conseco Finance's fast growth rate also alarmed some, including rating agencies, which feared that the company was taking on too much debt to finance that growth.
And Green Tree's reliance on securitization was a big sticking point. During the global financial meltdown of late 1998, the market for securities backed by subprime loans tanked, and many companies similar to Green Tree were unable to sell their loans profitably and went out of business.
Another hazard of being a securitizer: The company retained the riskiest portions of its asset-backed bond issues, the interest-only securities, which are difficult to value and vulnerable to defaults and changes in interest rates.
Conseco also said Friday that it would have to take another writedown on the interest-only securities, which would result in a noncash charge of about $350 million and force it to restate last year's earnings.
Conseco had taken a similar writedown when the acquisition of Green Tree closed, and Green Tree had restated the value of the interest-only bonds when it was independent. Faster-than-expected prepayments had made these revisions necessary.
To make such accounting surprises less likely, Conseco said last September that it would scrap gain-on-sale accounting, a controversial method in which profits on loans are booked before they are received. It now books income from loans when it comes in.
The latest revision of the interest-only securities befuddled analysts. "I'm confused," said Ms. Gordon, of Warburg Dillon Read. "A month ago they said an intensive audit on all intangible assets had concluded that everything was fairly valued. The asset-backed market isn't materially different today from a month ago."
Conseco did not return American Banker's phone call by press time. On the conference call, an official said the latest revision was simply a matter of taking a more conservative outlook, and that losses and delinquencies on the company's loan portfolio were "well within the targets."
Ms. Gordon said Mr. Hilbert "was trying to evolve into an operational guy from an acquisitions or consolidation manager." But she said the market was skeptical of his ability to build the company internally, "especially in a business he was not familiar with."
"The lesson is to ease into a business like this," Ms. Gordon said. "Don't jump in with both feet."
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