Paul Mumford: Investors will toast the demise of 'a deal too far'

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

Start your day with The Independent, sign up for daily news emails
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

Where the spooks get their coffee fix: The busiest Starbucks in the US is also the most secretive

The secret CIA Starbucks

The coffee shop is deep inside the agency's forested Virginia compound
Revealed: How the Establishment closed ranks over fallout from Loch Ness Monster 'sighting'

How the Establishment closed ranks over fallout from Nessie 'sighting'

The Natural History Museum's chief scientist was dismissed for declaring he had found the monster
One million Britons using food banks, according to Trussell Trust

One million Britons using food banks

Huge surge in number of families dependent on emergency food aid
Excavation at Italian cafe to fix rising damp unearths 2,500 years of history in 3,000 amazing objects

2,500 years of history in 3,000 amazing objects

Excavation at Italian cafe to fix rising damp unearths trove
The Hubble Space Telescope's amazing journey, 25 years on

The Hubble Space Telescope's amazing journey 25 years on

The space telescope was seen as a costly flop on its first release
Did Conservative peer Lord Ashcroft quit the House of Lords to become a non-dom?

Did Lord Ashcroft quit the House of Lords to become a non-dom?

A document seen by The Independent shows that a week after he resigned from the Lords he sold 350,000 shares in an American company - netting him $11.2m
Apple's ethnic emojis are being used to make racist comments on social media

Ethnic emojis used in racist comments

They were intended to promote harmony, but have achieved the opposite
Sir Kenneth Branagh interview: 'My bones are in the theatre'

Sir Kenneth Branagh: 'My bones are in the theatre'

The actor-turned-director’s new company will stage five plays from October – including works by Shakespeare and John Osborne
The sloth is now the face (and furry body) of three big advertising campaigns

The sloth is the face of three ad campaigns

Priya Elan discovers why slow and sleepy wins the race for brands in need of a new image
How to run a restaurant: As two newbies discovered, there's more to it than good food

How to run a restaurant

As two newbies discovered, there's more to it than good food
Record Store Day: Remembering an era when buying and selling discs were labours of love

Record Store Day: The vinyl countdown

For Lois Pryce, working in a record shop was a dream job - until the bean counters ruined it
Usher, Mary J Blige and Will.i.am to give free concert as part of the Global Poverty Project

Mary J Blige and Will.i.am to give free concert

The concert in Washington is part of the Global Citizen project, which aims to encourage young people to donate to charity
10 best tote bags

Accessorise with a stylish shopper this spring: 10 best tote bags

We find carriers with room for all your essentials (and a bit more)
Paul Scholes column: I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England

Paul Scholes column

I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England
Jessica Ennis-Hill: 'I just want to give it my best shot'

Jessica Ennis-Hill: 'I just want to give it my best shot'

The heptathlete has gone from the toast of the nation to being a sleep-deprived mum - but she’s ready to compete again. She just doesn't know how well she'll do...