Paul Mumford: Investors will toast the demise of 'a deal too far'
Wednesday 02 June 2010
The brusque rejection by AIG of Prudential's reduced offer for its Asian unit, AIA, looks likely to be the death blow that finally puts this audacious bid – already floundering in the face of an unprecedented shareholder rebellion – out of its misery. Should Pru's management and its lofty-thinking chief executive, Tidjane Thiam, fail to see the writing on the wall, the bid will almost certainly not be approved at its extraordinary general meeting on Monday.
While the deal's collapse may disappoint those many stalwarts in the City who were set to profit handsomely from it, the majority of shareholders and ordinary investors will rightly be toasting the demise of "a deal too far".
The mere fact that Prudential approached AIG with a revised offer comes only just short of an admission that the original deal was overpriced. But this isn't just about price. From the moment of its announcement in early March, the deal has triggered the concern of many – from shareholders who would be gambling on a deal of this size or else face massive dilution, to the regulator, which unusually intervened due to fears over Pru's capital.
Even at first glance, the deal appeared too big, too ambitious, too risky – fundamentally misjudging the current mood of the market and the appetite of investors. Strikingly, AIA has a larger market capitalisation than the already large Prudential. Put simply, there were justifiable fears that Prudential was looking to bite off more than it could chew. Severe doubts have since emerged about how much synergy there really is between two businesses that, after all, operate in vastly different markets. Prudential would be putting all its eggs in a higher-risk Far Eastern basket, tying its fate to the Asian market and taking on considerable sovereign debt to boot.
This was at first glance. As events progressed and analysts pored over the details, the picture worsened. AIA's management made their opposition to the takeover clear, threatening an immediate walk-out should the deal go through. It emerged that not all of Prudential's management board were planning to take up their own rights. Growth forecasts started to look a little frothy. The Asian geographies involved looked less appealing.
Global markets have since fallen back too, and the continuing volatility in currency markets only underlines the inherent riskiness of what is essentially taking a British business and turning it into an Asian one. Shareholders have been told that the merger will not generate uplift in earnings until around 2013. This is too long to tell your shareholders to wait for value, unless you have a very good reason. Pru's management don't.
So, what now for the Pru? Considering the loss of reputation for those close to the deal, there is a small chance that management will insist on taking this to D-Day, putting the original offer to shareholders next Monday. However, if they have any wits about them, and if Pru's bounce in share price is anything to go by, they will look for the most graceful possible retreat.
Options remain for the company, after an already promising set of first-half figures. The ideal solution would be to augment the Pru's growth strategy with some smaller bolt-on acquisitions, cherry-picked across the high-growth Asian market over the next few years. By contrast, the speed, size and complexity of the current deal smacks of the irrational thinking of other high-profile disasters such as RBS's fatal ABN Amro acquisition.
Options remain, but whether shareholders can forgive management over what has happened is a different matter. Heads could roll.
Paul Mumford is a senior investment director at Cavendish Asset Management
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