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May 2010

Prudential & AIA: more problems

Prudential’s madcap scheme to buy AIA is still not going well.  Earlier in the week, the CEO of AIA was reported as telling friends that the deal was “unworkable”, and now they are trying to reduce the price.  And the SCMP finally seems sufficiently interested in the story to have assigned one of its own writers rather than recycling agency reports:

Prudential seeks price cut to save AIA deal

British insurer in talks with AIG for discount to win over investors opposed to buyout

Prudential is scrambling to secure a last-minute discount on the US$35.5 billion price it is paying for Asian rival AIA Group, in a bid to save the controversial buyout that a significant minority of its shareholders oppose.

The British life insurer said it was talking to AIA's US parent, American International Group, about changing the terms of the transaction. It would now offer US$30 billion for AIA, analysts at Bernstein Research said, although Prudential did not confirm this.

While it is highly unusual for shareholders in blue-chip British companies to vote against acquisitions, Robin Geffen, a London-based fund manager who has set up an action group to oppose the takeover, said 20 per cent of Prudential's investors supported him.

Even at US$30 billion, some investors say the ambitious takeover remains too risky, because the British firm will still be paying vastly more than its £13.7 billion (HK$155.62 billion) market value for AIA.

"Discussions regarding the current status of the transaction have taken place between Prudential and AIG and are continuing," Prudential, which is primarily listed in London but also joined the Hong Kong stock exchange on Tuesday, said. "These discussions may or may not lead to a change in the terms of the combination of AIA and Prudential".

"Paying US$5 billion less is a side issue," said a British fund manager, who owns Prudential stock but cannot talk publicly about individual companies. "And shareholders who are against the deal have other fundamental concerns."

The investor said Prudential could fail to integrate its already large Asian insurance sales force with AIA's because the two companies had operated as bitter rivals in this region for decades.

Well, indeed.  That won’t be easy to solve, as Mark Wilson understands.

He added that he was "very uncomfortable" with Prudential chief executive Tidjane Thiam's plan to rapidly transform the insurer into an Asian business.

"This is a stable British company paying good dividends. After this deal, over 80 per cent of its business would be in Asia. And I don't run an Asia fund," he said.

Today, the Observer takes a negative view (Prudential's bid for AIA wilts under heat of criticism), whilst the Sunday Times seems more positive (Pru wins backing for 10% off AIA) – but why should AIG agree to cut the price when there’s already a deal in place with penalty clauses if Prudential fail to complete on time? 


Prudential & AIA – more nonsense

Prudential still seem to be struggling with the takeover of AIA.  They had a run-in with the Financial Services Authority in the UK, but that has been resolved, and now they have published the prospectus.

imageThey claim that they can deliver $800m of revenue improvements by (amongst other things) making AIA’s agents more productive.  They have figures to back this up – from last year (2009).  Hands up anyone who can think of anything that might have adversely affected AIA sales last year.  Yes, that’s right, AIG had come close to collapse and been rescued by the US government.  So this is not a meaningful comparison, as has been pointed out:

Prudential's AIA revenue claims disputed by study 

Pi Financial Services Intelligence, a Singapore-based consultancy, said that Pru and AIA agents showed similar productivity levels before the financial crisis. Simon Drimer, Pi FSI managing director, told the Financial Times the analysis the consultancy had conducted showed there was ‘no material difference between the two companies' agent productivity levels’.

But Prudential stood by its claims that it would deliver higher productivity. It said that based on 2009 figures, its agents were more productive compared with AIA in nine out of 10 regional markets, with AIA holding the upper hand in Thailand alone.

Yes, 2009 figures.  We all know why AIA struggled in 2009, and why AIA’s agents are already becoming more productive. This trend is confirmed by the figures for the first three months of this year, but of course Prudential use them to argue that they have got a bargain, and conveniently ignore the implied productivity growth.

Barry Stowe of Prudential Asia is quoted as saying that Prudential can “restore AIA to its former greatness” by offering its agents more and better products.  Yeah, right.  So why is AIA much bigger and more successful than Prudential in Hong Kong and much of the rest of Asia?  Why indeed does Prudential want to buy it?  Perhaps Mr Stowe should think about that before commenting.

I know nothing about the “products” sold by AIA or Prudential, but I can guarantee that the management of both companies know each other’s products very well indeed, and if Prudential have a successful product then AIA can easily create something very similar.  These are not physical products that can be patented, and they are not even intellectual property that can be copyrighted.  So it’s highly unlikely that Prudential’s “superior products” are going to help AIA to make more money.

This brings us back to one of the fundamental problems with this deal.  The prospectus states that:

…the Acquisition is primarily a growth focused transaction, although cost synergies will also be sought.   Prudential intends that the Enlarged Group will use both the Prudential and AIA Group brands, maintain separate agency forces and strengthen both agency forces by the sharing of best practices.

So you have to question whether Barry Stowe is wise to make all this noise.  It may be possible to “strengthen both agency forces” but not if you drive AIA agents away by telling them that Prudential is so much better than AIA (especially when the evidence suggests otherwise). 

Is Prudential paying less than AIA is really worth?  Because that is the only reason Prudential shareholders should approve the deal. 


Letter of the week

In amongst the usual dross there are sometimes a few words of wisdom in the SCMP letter column:

Parents sending wrong message on trains

Hong Kong parents have a very annoying habit when travelling on the train with their children.

They let their two- to three- year-olds occupy a seat in a crowded train when the child can sit in the parent's lap and let another weary passenger rest his feet.

These "little darlings" clearly do not need the seat, judging from the way they restlessly fidget, squirm and kick, and worst of all, tramp their dirty shoes all over the seat.

I have only seen this kind of behaviour being tolerated in Hong Kong.

Parents do not seem to appreciate that this is very unhygienic. When you ask the parents to remove the child's shoes or move the child from the seat, you either get no response or you get a look of irritation.

Presumably these are the same adults who will, in a few years' time, be allowing their young sons and daughters to rush onto crowded trains and grab a seat in front of passengers who have queued in an orderly fashion.

Nina Cheung, Sha Tin

Very true, and only this afternoon I was travelling on the MTR and saw a small child standing on a seat, exactly as described. I fear that Hong Kong suffers from “Little Emperor” syndrome - some parents are apparently quite unaware of how selfish they are being.

You see the same thing in swimming pools: a complete lack of consideration for other users of the pool, and this absurd habit of allowing children to stand on the benches in the changing room because the floor is wet or dirty - which duly makes the benches both wet and dirty for everyone else. 


Hovering overhead

Sky News have been making the most of the lengthy post-election negotiations, and they even have (or had) a helicopter flying around London to try to make it all more exciting. On Monday when Gordon Brown was making his first resignation speech of the week you could clearly hear it overhead. It was a curious speech, presented in such a low-key way that you might almost have missed what he was saying. You could imagine the headmaster saying "Speak up, boy, and apologize properly", but Brown couldn't quite bring himself to say that he was resigning.

Predictably, the right-wing newspapers were not happy. They had wanted Brown out, but became even more angry when he confirmed that he would be leaving. Their real fear, of course, was that it increased the chance of a Labour-Liberal Democrat coalition. For a few hours this terrifying prospect did seem to be a real possibility, but thankfully the moment soon passed, and last night Gordon Brown really resigned and David Cameron finally became PM.

The Liberal Democrats seem to have got a lot of what they wanted, including the promise of a referendum on the Alternative Vote system and various concessions on policy, but is this really an election that anyone would want to win?  You might think not, but 13 years out of power for the Conservatives (and considerably longer for the Liberals) obviously bring a different perspective.

The difficulty for Sky News is that a “rolling news” channel wants things to be happening all the time - and in public. And when the most exciting thing the Sky helicopter can find is Sky's own reporters interviewing other journalists outside the Houses of Parliament there’s clearly a bit of a problem - though there has been other excitement on the channel.


Ridiculous

image

The Sun really is a ridiculous newspaper.  Their front page today has this nonsense about a ‘Brown Monday’:

DEFEATED Gordon Brown yesterday sparked fears of a City meltdown after trying to hijack a Tory-Lib Dem deal for a unity government.

His bid to rise from the dead by persuading the Lib Dems to prop him up raised the prospect of a stock market "Brown Monday".

World markets were expected to dump the Pound as the deadlock at Westminster continued to cause widespread political and financial chaos.

A deadline for coming to a coalition deal last night was missed - opening up the prospect of a massive wobble when the markets opened at 7am today.

Mr Brown made a desperate late bid to get the Lib Dems on side.

Despite claiming he was acting in the nation's interests, his meddling was not welcome by City experts as he threatened Nick Clegg's delicate talks with David Cameron.

City experts?  Pah..  So how is the Pound?  Here’s The Guardian

9.49am: Looking at Britain again, and the pound has strengthened against the dollar to a morning high of $1.4984 (from $1.48 last Friday). This has compounded (for now at least) speculation of a 'Brown Monday' on the markets as investors ditched the pound because of fears of a Hung Parliament.

12.04pm: The pound perks up after the Bank of England's decision to leave interest rates on hold. It rose 1.4% against the dollar to hit the day's high at $1.5017, but was little changed against the euro.


Sub-editors? Apparently not

I noticed this nonsense in the SCMP today, and assumed that someone might have spotted the errors and corrected them in the online edition.  No they haven’t…

Truck drivers in go-slow rally against fee

About 70 drivers staged a go-slow protest in Yuen Long yesterday to urge Guangdong authorities to cancel the lump sum fee that Hong Kong trucks have been charging to cross the border since 1993. Protest leader Stanley Chiang Chi-wai said the HK$100,000 fee, payable every three years in addition to provincial road fees, was unfair since Macau drivers did not have to. Joyce Ng