Asset managers know better where AIA is concerned

  • @Benchu_

Outlook Fans of Vic Reeves Big Night Out will recall the catchphrase: “You wouldn’t let it lie.” One person who refuses to let it lie is the chief executive of the insurance giant Prudential, Tidjane Thiam. Yesterday he was complaining about the fact that his bid to acquire AIA, the Asian arm of the bust American insurer AIG, in 2010 was scuppered.

The market capitalisation of AIA, which was floated independently in 2010, has doubled over the past four years to $64bn (£38bn), suggesting that the Pru’s initial $36bn valuation of the business was, in fact, a considerable undershoot. The failed bid ultimately cost it £337m in adviser fees and other expenses.

“AIA was a once in a lifetime opportunity,” Mr Thiam vented to journalists yesterday, as he unveiled a 17 per cent first-half rise in underlying operating profits. “I’m still animated by it.”

But who was he trying to impress by raking over this painful history? Was the goal to claim some belated vindication for his frustrated empire building? Two fingers, perhaps, to those who called for his dismissal at the time of the collapsed bid? Whatever the motivation, he only succeeded in advertising how little he has learnt over the past four years.

Insurers are supposed to have a deep understanding of risk and uncertainty. But Mr Thiam seems to struggle on this front. Betting the farm on a horse can still be an unwise thing to do even if the beast crosses the finishing line in first. It was very far from clear four years ago that the unprecedented storm in financial markets that broke in 2008 had ended.

Moreover, to describe the manner in which the Pru went about its bid as clumsy would be an understatement. The Pru made Mr Magoo look co-ordinated. Remember that the insurer was fined £30m last year by the old Financial Services Authority (FSA) for failing to inform regulators of its intention to bid. “A serious error of judgement”, read the charge sheet.

Mr Thiam himself was officially censured by the watchdog. In a meeting just two weeks before the bid was announced, he had apparently kept his counsel, leaving the watchdog to read about it in the financial press.

The FSA feared that the acquisition, funded by a $21bn rights issue, could potentially import systemic risk to the UK. Excessively fussy regulators? Hardly a credible accusation when one considers the Americans had needed to spend $85bn rescuing AIG only two years earlier. And let’s not forget that the bid would have significantly increased the size of the Pru. The FSA was, somewhat belatedly, doing its job of stress-testing merger activity.

A large part of the responsibility of chief executives of big financial firms is to handle regulatory matters. Even if the AIA bid was always as safe as Mr Thiam claims, he clearly failed to do his job properly in that regard.

Moreover, it was Pru shareholders who ultimately vetoed Mr Thiam’s deal back in 2010, not the regulators. They felt the mooted purchase price was too high; he failed to convince them otherwise. Someone who feels liberated to rage, albeit indirectly, against the stupidity of his employers is surely heading for a fall.

Shareholders of financial firms do not always take careful decisions. All too often they cheer on the kind of empire building that Mr Thiam was pushing. Think of Fred Goodwin’s ABN Amro acquisition. Think of Bob Diamond’s purchase of Lehman Brothers’ American equities trading arm.

There has been plenty of leisurely repenting over hasty expansions. But in the case of AIA, one can hardly fault shareholders for being reckless.

Furthermore, Mr Thiam’s insinuation that they missed out on a bonanza doesn’t hold water. Asset managers could, and probably did, buy into AIG’s spin-out float of AIA, meaning they have benefited from the surprise upside in the share price. Despite what Mr Thiam seems to believe, shareholders can reap value without acquisitions by ambitious chief executives.

In 2010 the Pru’s then chairman, Harvey McGrath (who ultimately carried the can for the bid fiasco), said he wanted to draw a line under the affair. But Mr Thiam wants to keep talking about it. For his own sake, he really should let it lie.