AIG making headlines again

Last autumn, when American International Group (NYSE: AIG) was trading at a frenzied pace, I shot a video ruminating on some of the reasons why these shares can be so volatile.  Given that this week has seen a resurgence in AIG’s stock price, as well as an increase in options volume and implied volatility, I thought it would be appropriate to update some of my comments from last autumn.

There are a few possible causes for the rally this week:  massive short covering is again one culprit.  The other is that AIG seems to be on the right track to selling off its assets at a high-enough price to generate real value for the equity.  As we have seen in the past couple of weeks, AIG has been able to ink deals to unload two of its huge international assets.   First were AIG’s Asian operations, which U.K.’s Prudential is scooping up for more than $35 billion, and the second was the Alico unit, which is being purchased by MetLife (NYSE: MET) for roughly $15.5 billion.

People need to remember that AIG equity is itself a lot like a call option.  If a company has hundreds of billions in assets and liabilities, and the equity is only worth a couple of billion dollars, there is huge leverage in its value as they sell off the pieces.  It can easily be worth nothing or a big multiple of where it currently trades.

Think about it this way:  The equity holders get what’s left over from the sales.  Let’s just use round numbers as an example.  If $100 billion is the expected sale value and liabilities are $98 billion, the resulting equity is then $2 billion.  If the company sells for $100 billion, the equity is worth exactly where it is trading.  However, if the assets sell for just a 5% discount, it is worth nothing.  If, on the other hand, they sell for $105 billion, then the equity is worth $7 billion.  That would be more than triple the current value.

Share and Enjoy:

Related posts:

1. Heavy Activity in American International Group (AIG): Sign of a Classic Short Squeeze?
2. Where the Action is: Financial Sector Focus in Today’s Options Market
3. Unusual Activity in SPX