Failed

Well, well.  Common sense prevails (for once) and a huge and stupid acquisition is abandoned.

Prudential top brass fight for their jobs as AIA takeover abandoned

Prudential has bowed to shareholder pressure and formally abandoned its attempt to take over the Asian insurer AIA, leaving its management team with a £450m bill as they fight for their futures.

In a statement released overnight, the Pru said it is terminating its negotiations with AIA, after parent company AIG refused to accept a reduced offer of $30.375bn (£24bn) against the original terms of $35.5bn.

Pru chief executive Tidjane Thiam, who is under pressure following the deal's failure, insisted that he was right to target expansion opportunities in the far east.

"We entered into this potential transaction from a position of strength in Asia and we view the region as offering excellent growth opportunities for Prudential," he said.

Blah, blah…

Pru chairman Harvey McGrath blamed recent market turbulence for sinking the "excellent opportunity" to buy AIG's far eastern assets.

"We listened carefully to shareholders over the price and initiated a renegotiation of the terms with AIG. Unfortunately, it has not been possible to reach agreement so we feel it is in the best interest of our shareholders not to pursue this opportunity," said McGrath.

It was never an “excellent opportunity”.  If Prudential have money to invest in Asia they should be using it to grow their own business, or buying much smaller companies that they could absorb.

The Pru must now pay a break fee of £152.5m to AIA for walking away from the deal, plus £81m in fees to City institutions. The rest of the £450m was incurred in legal and advisory fees, plus the estimated cost of various derivatives contracts which were taken out to hedge the value of the pound against the dollar. These contracts were needed because the Pru planned to raise £14.5bn in a record-breaking rights issue, but pay $23bn in cash. The pound had fluctuated against the dollar in the months since the bid was launched, and some analysts believe this may actually have generated profits, reducing the total cost of the failed bid.

Leading City investors warned last night that both McGrath and Thiam face calls to step down. Robin Geffen, chief investment officer of the fund manager Neptune, said the pair were guilty of attempting to buy "a large Asian company, at a very high price, with a very unclear strategy". James Chappell of Olivetree Securities questioned whether investors still had faith in Thiam, who became chief executive last October.

How can investors have any confidence in Thiam?  Surely he has to go.


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. 


Prudential – bold or barmy?

A year or so ago, Prudential (a British insurance company) apparently tried to buy 49% of AIA (an Asian insurance company based in Hong Kong and owned by AIG). This seemed doomed to failure for at least three reasons: they didn't offer enough; they didn't have the money; and how was it going to work if they owned 49% of their biggest competitor in several markets?

Now they are back in the toy shop and even more determined to get that shiny new plaything (Prudential gambles on Asia with $35bn deal):

Prudential, Britain's largest insurer, shook off the gloom that has dogged the City for the last two years with a record-busting financing package to fund a £23bn agreed takeover of Hong-Kong-based American International Assurance.

The acquisition signals a major push by the insurer into China and the Far East, where AIA was its main rival, with 20 million customers.

There’s that pesky problem again - in many markets Prudential and AIA are fierce competitors.  No-one seems sure how that will be resolved:

It was unclear how the company would operate after Thiam said the AIA brand would remain. AIA has 320,000 tied agents who have long seen the Pru's 400,000 employees as their main rivals.

Anyone who has been through any process where your company gets acquired (or "merged"), will know the problems this creates, especially when the acquirer is much smaller than the company being acquired -  and it's a well-established fact that most mergers destroy value rather than creating it.   Hostile acquisitions of “people” businesses are particularly risky - and you have to assume that everyone in AIA wanted an IPO rather than to be taken over by a rival.  This was a deal done by AIG and the US government, both of whom want as much money as possible as soon as possible, rather than by the management of AIA.

So there must be a fair chance that a significant number of agents may leave rather than work for Prudential, and you can be sure that other insurance companies will be watching this carefully to see how they can take advantage of the situation.

Prudential is undoubtedly a big name in the UK, and fairly well known in Asia, but AIA is much better known and has been in these parts far longer.  So there must be an argument for the new company being called AIA.  This would also remove the confusion with Prudential Inc., an unrelated US company, and after all the advertising that has been done in preparation for an IPO, it might be easier to issue new shares in Hong Kong under the AIA name.

But it almost certainly won’t happen.  Prudential’s top management are obviously feeling very pleased with themselves right now, and the last thing they want is to lose any of the glory.  Whether this will turn out to be a good deal for shareholders (whose interests the directors are supposed to be concerned about) is another matter. 

Prudential shares fell 12% to 530p yesterday against a slightly higher FTSE 100, while AIG shares were up 6% at $26.30.

"(The deal) is going to be enormously dilutive," said ING analyst Kevin Ryan. "No one knows exactly what AIA contains or how profitable it is, or how it overlaps with Pru's existing businesses."

Pru chief executive Tidjane Thiam rejected concerns that profits could be jeopardised. He said: "Transformational is an overused word, but this deal is truly transformational."

Well, yes, he would say that, wouldn’t he.  Oh, and thanks to the SCMP for their insightful coverage of this story (one article from Bloomberg, since you ask). 


Be careful what you wish for

Interesting article in The Independent (When the locals bought their local) about a pub that has been bought by its customers.  

Ten years ago this corner of northern Salford boasted eight pubs within walking distance of the Star. One by one they've closed their doors.

Before Christmas the Star nearly went the same way. Robinsons, the brewery, decided to sell up and gave three weeks' notice of closure. But the Star's locals formed a co-op and bought their drinking hole for £80,000.

This is not an isolated example:

According to the British Beer and Pub Association 39 pubs are closing every week. A new report from Co-Operatives UK estimates that 2,700 pubs will collapse in the next 12 months, compared to 2006 when there were just 316 net closures.

Any landlord can give you a litany of reasons for why the industry is so tough; from spiralling energy costs to tax hikes and the smoking ban. But two things get them most animated: the "beer tie", which forces half of the country's pubs to buy drinks from a particular brewer (often at vastly inflated prices), and the multinational companies known as "Pub Cos". Half of the UK's pubs are owned by Pub Cos, the two biggest owning a quarter.

The dominance of the Pub Cos can be traced to 1989 when the Thatcher government tried to inject competition into the pub industry. Breweries with more than 2,000 pubs were ordered to sell off their excess, and offer a "guest beer". The cleverer breweries worked out that there was nothing to stop any number being owned by a company that didn't make beer. So they set up property companies to own vast numbers of pubs and force licensees to buy off a brewer.

I know hindsight is a wonderful thing, but I remember wondering at the time whether one or more of the large brewers might decide that there was more money to be made in running pubs, and sell off their brewery business.   As they did.  The Guardian had a good article about this some time ago (Calling time) describing the way these huge “pub companies”operate:

'We buy beer cheap'" - from the big four breweries, Scottish and Newcastle (now owned by Heineken); Coors; Carlsberg; and Inbev (better known as Stella Artois) - "'and sell it dear, and that's our profit.'" There isn't much space, in this model, for a publican to make money. 

The Supply of Beer (Tied Estate) Order 1989 and The Supply of Beer (Loan Ties, Licensed Premises and Wholesale Prices) Order 1989 were intended to increase competition in brewing, wholesaling and retailing, by ensuring that no brewer could own more than 2,000 pubs. However, the consequence of this legislation was the creation of stand-alone pub companies, the pubcos, to whom brewers sold their pubs. The pubcos were exempt from the beer order legislation, because they did not brew the beer themselves.

So the government legislation totally failed to achieve what was originally intended.  In fact it has made things worse by moving control from the big brewers to the shadowy pub companies that are only interested in profits.  Smaller breweries find it just as difficult to sell their products into local pubs, and many landlords struggle to make a living.  It’s somewhat ironic that a Conservative government should have tried to interfere in the market in this way, but hardly surprising that it had such unfortunate consequences.   


Not so bad, lah

OK, so maybe I need to be a bit more positive.  Here goes...

Had a problem with my iPod, so I took it to the service centre in Quarry Bay.  I'd booked an appointment, but I needn't have bothered, because when I went there (at lunchtime) there was only one customer waiting to be seen.  The service guy looked at my iPod and agreed that they needed to replace it. 

The bad news was they didn't have any in stock, and they told me it would take about 10 days to get one for me, but the good news was that I got an email a couple of days later informing me that it was ready. 

Ordered some books from Amazon.  I wanted the British edition, so I ordered them from Amazon.co.uk even though they were more expensive.  They sent me the US edition.  I complained.  They sent me a horrible "copy and paste" letter thanking me for letting them know about the problem.  I said that this was a rubbish response.  So they refunded all my money. 

This is why Apple and Amazon are still making money whilst other companies are struggling.  Good customer service does pay off.  


Follow my leader

File under "well, that's a surprise, I'd never have expected that" - American Express have followed the lead set by HSBC and devalued their reward points. 

The conversion factor for Asia Miles (Cathay) and Flying Club Miles (Virgin) has been adjusted from 12:1 to 15:1,  meaning that you need 25% more points for each mile you redeem.  If we assume that the price that Cathay charges for top-up miles is the market value, this means you will be getting HK$0.016 for every HK$ you spend on your credit card (though presumably credit card companies pay much less for miles than members of the public).

There was a time when AE offered triple points (meaning an effective rate of 4:1), but that disappeared some time ago.  Yes, there are a small number of merchants who offer 10x points on the Platinum card, but you pay a hefty annual fee for the privilege of having that card, and the shops are not exactly renowned for low prices.  Or you can sign up for the Cathy/AE card and pick up some free miles if you're really desperate. 


Key culprits

Today's SCMP has a lengthy Bloomberg story about the credit-rating weasels - Bringing Down Wall Street as Ratings Let Loose Subprime Scourge by Elliot Blair Smith:

"I view the ratings agencies as one of the key culprits,'' says Joseph Stiglitz, 65, the Nobel laureate economist at Columbia University in New York. "They were the party that performed that alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.''

Driven by competition for fees and market share, the New York-based companies stamped out top ratings on debt pools that included $3.2 trillion of loans to homebuyers with bad credit and undocumented incomes between 2002 and 2007. As subprime borrowers defaulted, the companies have downgraded more than three-quarters of the structured investment pools known as collateralized debt obligations issued in the last two years and rated AAA.

Without those AAA ratings, the gold standard for debt, banks, insurance companies and pension funds wouldn't have bought the products. Bank writedowns and losses on the investments totaling $523.3 billion led to the collapse or disappearance of Bear Stearns, Lehman Brothers and Merrill Lynch and compelled the Bush administration to propose buying $700 billion of bad debt from distressed financial institutions.

Honestly, what is the point of having credit-rating agencies if they do this kind of stuff?

The second part of the Bloomberg story is here:

The world's two largest bond-analysis providers repeatedly eased their standards as they pursued profits from structured investment pools sold by their clients, according to company documents, e-mails and interviews with more than 50 Wall Street professionals. It amounted to a "market-share war where criteria were relaxed,'' says former S&P Managing Director Richard Gugliada.

"I knew it was wrong at the time,'' says Gugliada, 46, who retired from the McGraw-Hill Cos. subsidiary in 2006 and was interviewed in May near his home in Staten Island, New York. "It was either that or skip the business. That wasn't my mandate. My mandate was to find a way. Find the way.''


AAA-rated pigs

It now appears that AIG is going to avoid Chapter 11 bankruptcy, but it's striking how much power the credit rating agencies have in determining whether it fails or not.

By threatening to lower AIG's credit rating, the agencies precipitated a crisis.  This in turn sent AIG's share price down, which was enough to persuade those very same credit rating agencies to carry out their threat.  This in turn caused the share price to fall again.

Let's not forget that these are the very same credit rating agencies who were earlier very happy to give AAA ratings to the exotic financial instruments that caused the downfall of Lehman Brothers, forced Merrill Lynch to sell itself to Bank of America and pushed AIG to the brink.

You might think that the whole point of having credit rating agencies would be to stop clever bankers sticking some lipstick on a pig and pretending that it's something altogether more alluring.  Instead the credit rating agencies admired their handiwork and handed out the AAA ratings that they needed.  Then other clever bankers were happy to buy because that was how they got their bonuses, and if it had an AAA rating then that had to be OK, didn't it?

Having been so negligent earlier, the credit rating agencies seem happy to force AIG into bankruptcy, despite knowing that if it was given time it could sell off assets and recover.

One more interesting statistic, from The Guardian: "Figures out today showed hedge funds and other investors that had been shorting Lehman's stock since March had made $29bn from the firm's demise."


Reach for the mosquito fish

One of the things I love about The Economist is reading stories that tell me things I didn't know, and which I didn't know I didn't know.  I had never considered that the collapse of the housing market in the USA might increase the spread of the West Nile virus, but apparently it does, as the Economist reports (Meet the new neighbours):

THE empty house, in a middle-class corner of southern California, is two storeys high and boasts a three-car garage. Roses bloom around a kidney-shaped swimming pool, which is green with algae. Bill Bobbitt, a county inspector, dips a ladle into the water and brings up half a dozen wriggling larvae. Mosquitoes, and the West Nile virus that some of them carry, are thriving in California’s plunging property market.

West Nile virus arrived in America in 1999 and made it to California three years later. Since then it is known to have infected 2,300 people in the state, of whom 76 have died. In Orange County this is the worst summer yet. By this point last year officials there had discovered nine birds that had been killed by West Nile virus and not one infected mosquito. So far this year they have found 219 infected birds and 75 infected mosquitoes.

Some of this rise is due to better testing and co-operation with the animal services department, which receives most reports of dying birds. But a much bigger cause is the housing crunch. Fully 63,000 homes were foreclosed in California between April and June, according to DataQuick, a property data services outfit. In the past year the number of Orange County homeowners who have defaulted on their mortgages has more than doubled. Empty houses mean untended pools. Untended pools quickly breed mosquitoes.

Dead birds are also piling up in neighbouring counties like Los Angeles, San Diego and San Bernardino, which also have high foreclosure rates. Last week 170 infected mosquitoes were discovered in the state as a whole—the highest tally ever. So far this year 13 human infections have been reported in California, but the numbers are expected to grow rapidly as the summer moves on. John Rusmisel, president-elect of the board responsible for killing the critters, says a peak in infected mosquitoes is generally followed, two or three weeks later, by a peak in human cases.

In theory, owners are supposed to keep their properties in decent shape whether they live there or not. California has even passed a bill fining banks and mortgage companies that seize properties and then allow pools to fester. But Mr Bobbitt isn’t waiting for the lawyers. He has treated the pool in Santa Ana with oil and synthetic growth hormones, which will keep the mosquitoes adolescent, preventing breeding. Then he tips in a few dozen mosquito fish (Gambusia affinis), which begin happily munching larvae. You can buy a lot of the fish for what a lawyer charges per hour, and some authorities, with commendable creativity, even provide them free to help control the pests.

And again, I never realized that there were such a thing as a mosquito fish, but they seem to be a very practical solution.