Prudential’s risky plan to acquire AIA looked as if it was a “done deal”. Now things seem rather less certain (Prudential must explain AIA strategy):
The old view here was that Prudential's proposed $35.5bn (£23.3bn) purchase of AIA is very likely to complete. This was not because the deal is appealing – it's not, it looks too risky and too expensive.
Rather, it was because cold cynicism suggested that a company willing to shower $1bn in fees over the City usually gets its way.
It may be time for a rethink. A senior fund manager within the Pru's largest investor, Capital Research & Management, owner of 12%, is said to be unhappy with the deal. If that is true (the smoke signals say it is), Tidjane Thiam, the Pru's chief executive, is in trouble. He needs 75% support from shareholders to secure a green light. Without Capital, the arithmetic becomes tricky, especially as other City fund managers express in private their own misgivings.
Capital is said to prefer a break-up of the Pru. At the moment, that sounds like wishful thinking. Never mind. The deeper point is that the Pru must explain why betting the firm on one mammoth deal in Asia is an acceptable risk. To many outsiders, the best way to approach the Asian opportunity is via organic growth, where Prudential has enjoyed considerable success. Such a strategy would be lower risk, would save a small fortune in fees and would preserve the break-up option.
We wait to discover if next week's prospectus explains why this option was rejected. But Thiam needs to address the question. If he doesn't, it is easy to imagine how this tentative rebellion could become the real thing.
The Financial Times points to another big problem with this deal (Pru threatened by mass AIA defections):
Until a few weeks ago, pan-Asian insurer AIA, which has century-old roots across the region, was sailing towards a Hong Kong listing with a potential market capitalisation of up to $40bn. Now senior AIA executives sit silent, unable or unwilling to give their views on the Pru deal.
How many senior AIA executives, actuaries and agents remain following a takeover is extremely important for the combined group if it is to deliver the sales increase being flagged to investors to justify the price and the $21bn rights issue that will fund the deal.
To hit its growth targets, the Pru wants 300,000 new agents to increase its sales force to almost 1m. So any exodus of AIA staff would be painful.
AIA, which is owned by AIG, the stricken US insurer, has been a fierce rival of the Pru for decades in Asia, home to the world’s fastest-growing markets for life assurance.
Analysts at CLSA, the Asia-focused brokerage, this month described the situation in evocative terms. “This isn’t a friendly merger,” they said. “It’s more like parents forcing the daughter to marry someone she doesn’t like for money. The integration will be an uphill battle.”
Indeed it will - but we already knew that (Prudential bold or barmy?). Oh, and if you can’t negotiate the FT paywall, the same story is over at the New York Times (Pru Takeover May Be Undermined by Exodus).