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Pru's receding hopes of AIA victory

Robert Peston | 20:40 UK time, Wednesday, 26 May 2010

It's touch and go whether the Pru is forced by its owners to abandon its £25bn-odd purchase of AIA, the Asian insurer being sold by AIG of the US.

What I am hearing is that three of its big investors, Capital Research Investment, Blackrock and Legal & General, are planning to vote against the deal, in respect of at least some of their respective shareholdings.

Now, I should point out that there's more than a week for them to formally make up their minds.

And these big investors are neither confirming or denying their voting intentions.

But the Pru knows they're less than ecstatic about the proposed takeover and that it has to charm them into submission.

Between them they own more than 20 per cent of the famous British life insurer - though it's highly plausible that a huge manager of various funds like Capital will vote some of its shares against the deal and some for the deal.

So for the sake of argument, let's say that these three shareholders were to collectively vote 16 per cent or so against the takeover - which isn't implausible, given the widespread view (which I'm certainly not endorsing) that the Pru is paying too much to bite off rather more than it can safely chew and digest.

That doesn't on the face of it sound like a disaster for the Pru's management, led by the chief executive Tidjane Thiam, who is travelling the globe trying to woo shareholders on three continents.

But in fact 16 per cent could be enough to kill the deal.

Because the Pru needs a 75 per cent majority of votes cast.

And if there's, say, a 65 per cent voter turnout, 16 per cent would be almost exactly enough to block the takeover.

If that were the outcome, and the Pru were to fail to become the market leading life insurer in one of the most economically vibrant regions of the world, others can judge whether the owners would have performed a public service in squishing dangerous management hubris or would have committed an act of short-termist vandalism on laudable corporate ambition.

One things for sure though: other ambitious British companies would think twice before asking their shareholders to finance empire-building expeditions (which some of you may feel is a good thing, though don't forget that the UK has been selling itself off by the pound to overseas interests for donkeys years).

Comments

  • Comment number 1.

    Robert, ask yourself why there have been no counterbids for AIA. A tad expensive perhaps! The whole deal smacks of too much financial engineering, will probably leave the UK business as a hollowed out shell, seems to have self agrandisement by the CEO written all over it and yet more UK wealth will depart to Asia. My shares worth .0001% approx. of overall shareholdings will vote against. Should swing the decision!

  • Comment number 2.

    The deal is viewed as being 'too big for the Brits' from across the pond?
    So much for the imaginery 'special relationship'
    So why all the useless bleating about Kraft 'scull-duggery' today - anyone can see that the Brits are a total 'push-over' in regard to global business.
    The only asset we have is our banking/finance sector - scares the pants off the whole wide world - now no one dare touch that ... even with a Roumanian barge-pole!

  • Comment number 3.

    OK, we get the message that you're not suggesting that it's either a good deal or a bad deal, yes, yes....

    But the Pru's existing UK policyholders, who are the people who will be most disadvantaged by this deal (given that it will inevitably lead to higher charges for them in the long run), get no say whatsoever of course.

    And we know that the vast majority of large take-overs destroy shareholder value, of course.

    If one imagines a worldwide equity market drop of maybe another 20% over the next year or so, due to the debt hangover, and then things going nowhere for another three years or so, how would the deal look then?

    I have a question.

    Has any ambitious young executive getting his or her first CEO job in a first division company, and who is keen to establish a reputation, ever had the imagination to do anything other than try to buy a competitor?
    (we've heard it all before haven't we.... 'industry transforming deal', 'new paradigm' and all that guff).

    I can't think of one.

    It's all so predictable, and, to date, has been so easy.

    Hopefully the tide will turn, and these disastrous ideas are unwound before the damage is done rather than after (e.g. ABN Amro).



  • Comment number 4.

    Oh, and another thing.

    Comment please on the latest news re the Kraft takeover of Cadbury.....

    "Kraft's advisers throughout the bid was the investment bank, Lazard, where a senior banker at Lazard at the time was Peter Kiernan.

    He was due to become the next director general of the Takeover Panel.

    A statement released along with the Kraft criticism said simply: "Peter Kiernan has informed the Takeover Panel that he has decided to withdraw his candidacy for the role of Director General following the resolution of the Panel's investigation into certain statements made about Cadbury plc's Somerdale facility during the offer by Kraft Foods Inc for Cadbury plc".

    Yes, very embarrassing!

    And guess where Peter Kiernan worked earlier on in his career?!

    Yep, no less than that fine institution recently referred top as the "great vampire squid wrapped around the face of humanity"

    It's laughable.

    Honestly... how can we carry on with a system where the poachers and gamekeepers swap jobs on such a regular basis?

  • Comment number 5.

    Excellent point Noideaatall, good blood-hounding. Pru's shareholders, or at least some of them, have in mind RBS's ill fated Dutch invasion. What fascinates me is the pathology of the decision and the motivation of directors to take risks as a snake attempting to devour a pig. Even with an 80% discount rights issue professional shareholders have got cold feet. My words (not money) are on the deal not completing.

  • Comment number 6.

    I guess that some of the largest shareholders in Pru are also its main competitors. Could they be voting for their own company's advantage rather than for the best long term future of the Pru?

  • Comment number 7.

    Agreed

    General Pyrrhus would approve if they win.

    It would remind everyone of the ABM Amro triumph of RBS over Barclays

    Most take over involve a big company over paying for a smaller one. Shareholders are better off in the company taken over especially with cash bids. No one sane in the current market could support such a ludicrous bid?

    As with the BA strike with nothing left to win one wonders if the egos of board members to be seen to win rather than do the best job for shareholders is really at stake here.

  • Comment number 8.

    The fact that an area is economically vibrant, doesn't necessarily easily translate into millions more potential customers, especially when insurance is not exactly high up their list of purchases. I think the Pru have been dazzled by the big numbers from 'advisors', and need to pinch themselves hard before they step off the cliff.

  • Comment number 9.

    Robert Peston,

    Please consider if the possible failure of the Pru deal and the OECD comments about UK interest rates may be suggestive that the UK economy is about to be seen as the 'king with no clothes'?

  • Comment number 10.

    So I have a Prudence Bond trust fund with about £40k in it which is meant to fund my daughter's education. I was thinking that if the AIG buy out went ahead the fund would go up in value. Am I correct or shall I get out now? Advice welcomed.

  • Comment number 11.

    Pru seems to be ignoring the plain fact that insurance in the Far East has traditionally been of little interest to ordinary people unless it is compulsory. Pru management must have great confidence or arrogance to think that they will change such long held attitudes and traditions.

    I like many small shareholders will be voting against.

  • Comment number 12.

    I hope the bid fails. this is high risk and at this time shoild not go ahead. The senior management teams needs to be replaced, are they in the real world ?

  • Comment number 13.

    4. At 9:42pm on 26 May 2010, Noideaatall wrote:
    Oh, and another thing.

    Comment please on the latest news re the Kraft takeover of Cadbury.....

    Would be nice to know if the detail of the Kraft critism effectively meant the deal would have been blocked and if so what is to be done. Ultimately the kings of business use words like mislead and mistake where us in the real world use fraud and deception.

    There is no accountability with MPs Bankers Accountants and Big Business yet but things are about to change folks. Go find somewhere safe to hide rich boys lol !

  • Comment number 14.

    "don't forget that the UK has been selling itself off by the pound to overseas interests for donkeys years"

    That is what has to happen when you import more than you export. An equal but opposite flow of money has to come back into the country through investment and lending.

    So if you want to import goods and services, you either have to export goods or services, or borrow the money, or sell off your assets. The exchange and interest rates will move to balance all of the above.

    And guess what, the world doesn't want to buy enough UK exports, or lend enough to overborrowed brits. What you're left with is asset sell-off, lower exchange rate, and any moment now, higher interest rates to attract the balancing capital inflows.

    I guess one reason this deal seems unpalatable is that the exchange rate has moved to make the size of this purchase very large, at the same time as UK investors know that their cost of capital will soon go through the roof - reducing the relative attractiveness of investing abroad. Thiam is inviting investors for a swim against some pretty strong economic currents.

  • Comment number 15.

    @ 2. At 9:29pm on 26 May 2010, nautonier wrote:

    > The only asset we have is our banking/finance sector

    We're only talking about assets, not liabilities.

  • Comment number 16.

    @ 12. At 07:19am on 27 May 2010, Johnny Norfolk wrote:

    > I hope the bid fails. this is high risk and at this time shoild not
    > go ahead. The senior management teams needs to be replaced, are
    > they in the real world ?

    Perhaps a little on the harsh side? They are playing the game according to
    their simplistic understanding of the rules.

    We have not yet spelled it out that "small is good" and "large is dangerous".
    Until we get that out of the way, these City-types can't grasp the
    requirements, so we can hardly blame them for trying.

  • Comment number 17.

    If I were a Pru investor I would be looking very hard at the information being supplied by AIA and its Parent AIG before making any decisions. AIG was one of the lead 'insurers' of CDO's which brought down the financial markets. Its own 'ghost' finance set up in London, operated as an investment bank in all but name ( and regulation).

    Previously, Berkshire Hathaway's own Q1 2008 financial statements make it clear that it was co-operating with US SEC investigators over AIG Directors mis-stating financial statements (see Note 18-Contingencies). Though the note refers to prior years transactions, investigations were still ongoing and certain Officers of AIG and Berkshire Hathaway Insurance arms were convicted of offences.

    I am amazed that a company of the Pru's standing would allow itself to contemplate the acquisition of a subsidiary business of AIG where AIG are in the dock in the US.

    Maybe the deal should happen, if it were a fire sale to raise money for the now Government owned business. But at the current level it is overpriced and is fraught with too many skeletons in cupboards to make it worthwhile.

  • Comment number 18.

    Chris B is exactly right, the killer is, or should be, the exchange rate.
    Why the suggested takeover in the first place? Well, middle management has to come up with suggestions to change things to "improve profitabilty" and senior management has to take serious decisions to "expand the business model" or they'll be out of a job. Having taken the decision then egos kick in and commonsense gets left on the sidelines.
    The effect of a takeover like this is to either water down the Pru's management structure in the UK as some top managers will be needed to look after their new foreign asset or take the risk of leaving the AIA management alone.
    Risky? Well that's what Midland did with Crocker and they nearly went bust. There are plenty of other examples; it all looks so simple on paper but it's a nightmare to organise even in these days of easy international communication.
    If the rights issue goes ahead subscribers will be investing in a foreign asset at the wrong time in the exchange rate cycle. As G Osborn knows, as a student of modern history, what goes around comes around and the exchange rate will eventually come back so even if AIA is profitable, by the time it converts back to sterling you'll still be making a loss.

  • Comment number 19.

    I have been saying all along that the Pru offer was too high. Post 1 makes a very valid point in that people are hardly falling over themselves to make a counterbid.

    The Pru's bid is based on the promise of jam tomorrow in the form of higher returns from boom areas such as China and India. Let us nail that one great lie once and for all.

    About the only foreigners ever to make supra normal profits in China were the opium dealers in the 19th century and the British who at the same time won Hong Kong at the end of a gun barrel.

    Since then and allied to the actions of the Japanese in the 1930's the Chinese communists will allow you to do business but only on their terms and only for a certain percentage holding in any business.

    The power companies, manufacturers, car companies and virtually everyone else has looked on China as a means of making jam tomorrow and virtually all of them have had to admit defeat.

    As per India the regulations there are almost as extreme. Also just think all that offshoring that has gone on in processing of insurance and other financial products over the last ten years is growing a generation of competent financial professionals. Oh and who tends to own these ourtsourcing companies? Wipro, Tata and Reliance just the sort of local companies to take all the jam tomorrow when India really booms for financial services.

    Reject the bid and do it now. Otherwise it will be the UK shareholders and policyholders who will pay in the long run.

    If you want somewhere safe to put your investments in insurance at the moment then buy Aviva shares as they are staid and boring and at the curent share price yielding 8% plus.

    By the way I don't work for either the Pru or Aviva.

  • Comment number 20.

    No wonder British business is in terminal retreat! The most adventurous proposal in years is under threat because it is possibly not gilt-edged. With such risk aversion, no wonder Asia is overtaking us! As a small shareholder in the Pru I welcome the proposal and would happily take up my rights.

  • Comment number 21.

    All this user's posts have been removed.Why?

  • Comment number 22.

    '...£25bn-ODD purchase of AIA...'

    Is this a coded message Mr Peston ?

  • Comment number 23.

    @14 Chris B: your argument is only true if the amount of money is fixed. But it isn't. Banks create money, and since the UK has the biggest banking sector in the world, it creates more money than other countries. This capital gets exported to countries that need it, and they export goods to the UK in exchange.

    So a negative trade balance can in principle be sustained indefinitely (though of course in the real world booms and busts make the ride choppy).

  • Comment number 24.

    Pru takeover of AIA, not a good thing in my opinion.

    On another note, has anybody any idea how much our local authorities have invested in the Spanish banking system ?

  • Comment number 25.

    I'm intrigued as to what counts as a British Buisness these days.

    Does it have to be registered/ incorporated in the UK or listed maybe.
    Is it where it carries out the majority of its activities?
    Is it where it pays corporation tax?
    Or where it has the most staff perhaps?
    It may be where the board meets that decides

    What are we lamenting when we moan about losing Great British businesses ?

    No agenda here. Just interested.

  • Comment number 26.

    Well I think the Prudential should get their direct debits department sorted out first.

    On second thoughts may be they should simply up sticks and move to Asia on block, and take their direct debits department with them.

    And never darken these shores again.

  • Comment number 27.

    15. At 10:03am on 27 May 2010, Jacques Cartier wrote:

    @ 2. At 9:29pm on 26 May 2010, nautonier wrote:

    > The only asset we have is our banking/finance sector

    We're only talking about assets, not liabilities.

    >>>>>>>>>>>>>>>>>>>>>>>>>>>>

    It is an asset or potential asset if pro-actively and aggresively regulated with new transparent accountancy standards and government guidance on 'UK investment' ... as its all 'our' money. It is not all bad news - it just does not work for the overall good of the UK, at the moment. The current mess is just an arrangement because our governments do not tackle the problem(s) and vested interests - perhaps things will now change?

  • Comment number 28.

    20. At 10:50am on 27 May 2010, Raddon wrote:

    "No wonder British business is in terminal retreat! The most adventurous proposal in years is under threat because it is possibly not gilt-edged. With such risk aversion, no wonder Asia is overtaking us! As a small shareholder in the Pru I welcome the proposal and would happily take up my rights."

    Gosh, there really is one born every minute isn't there...

  • Comment number 29.

    23. At 11:48am on 27 May 2010, goodthinkinggeorge wrote:

    "@14 Chris B: your argument is only true if the amount of money is fixed. But it isn't. Banks create money, and since the UK has the biggest banking sector in the world, it creates more money than other countries. This capital gets exported to countries that need it, and they export goods to the UK in exchange."

    ...but as with all things, the more in circulation the less value it has - so this scenario is bunkum.

    "So a negative trade balance can in principle be sustained indefinitely (though of course in the real world booms and busts make the ride choppy)."

    Oh definitely not - the only way you can maintain a trade deficit is by constant devalutation of your currency - and what do you think that does to the price of your imports and consequently the monetary value of your deficit?

    This is exactly why we're going to be in so much trouble - everyone thinks there is no cost to this devaluation - but there will be, you'll probably see it first at the pumps.

  • Comment number 30.

    I hate to say it but these CEO's really don't learn from previous mistakes.

    We have already established that giant companies are a bad idea, for when they get into trouble only the Government has the funds to save them.

    Since that was made blatantly obvious in 2008 we have had:

    BA merging with Iberia
    Pru trying to buy AIA
    Asda buying Netto

    ...to name but a few. So can anyone from the business world be bothered to explain why they are so backward in this respect?

    I think Mohammed Al Fayed had it spot on - he said (and I quote)

    "You think we have government? You think those politicians have any intelligence, ruling the country? They go like donkeys, you elect them, put them in power. It's really a shame. Can you tell me what life experience they have - to put them prime minister? From one d*ckhead to another. Major ... Margaret Thatcher. Tony Blair ... I would not use him as a doormat downstairs. Prescott. All these characters. Do those people have any intelligence to rule such a great country, such great people? You have so many intelligent, so many gifted people ... but you only go and elect d*ckheads to rule you."

    ...couldn't have put it more accurately myself.

    (taken from http://www.thisislondon.co.uk/standard/article-23838358-a-four-letter-farewell-from-mohammed-fayed.do%29

  • Comment number 31.

    No manager should be allowed to bet the farm on a single project. I hope the deal fails.

    GF

  • Comment number 32.

    The deal has been delayed by questions raised by the Financial Services Authority (FSA) which, of course, is the UK's financial regulator.
    Why?
    The deal is not yet complete and already company is talking about debt financing to raise $5.4B, and let’s not forget that it’s AIG, the bailed-out US insurance company, that's doing the selling here.
    Regulators in the United Kingdom are dragging their feet, delaying the $21B rights offering until the two parties can demonstrate that the company will have adequate capital. The delay, or any disruption to the proposed takeover deal, could mean a major setback for AIG’s efforts to raise funds to pay back its debts to the US government (a factor which of course should be irrelevant to whether this is a good deal or bad). Prudential had planned to issue a prospectus with details of the offering, including how many new shares will be issued and at what price to shareholders. But the British government’s Financial Services Authority (FSA) put things on hold. The FSA told Prudential and its advisers that it needed more time to review the figures.
    Prudential still expects to complete the $35.5B purchase of AIA Group Ltd.
    The deal, which prompted a major sell-off in Prudential’s shares when it was announced in March, calls for Prudential to hand over shares and other securities, valued at $10.5B, and $25B in cash to US government-owned AIG as payment for AIA.
    To buy it, Prudential is going to issue shares to AIG, as well as undertake a $20 billion share issue that will double its capital and dilute shares of existing shareholders. In other words, it’s a bad deal for existing Prudential shareholders.”
    It's not clear what the FSA issue is, but we can only assume that it wants the company to have more capital, or a higher quality of capital.
    Meanwhile trading report shows, record new business for Prundential - 807 million pounds in the first quarter, a 26 percent increase from a year earlier. New business profit was up 27% to 427 million pounds. Group Chief Executive Tidjane Thiam seems confident. He feels he has the team, the skills and the discipline to successfully integrate these businesses…
    Also, if the AIA deal falls through, Prudential will owe AIG a termination fee of $230.6M.
    Something about this deal just doesn’t smell right…
    Maybe it’s the involvement of AIG, maybe it’s the price and diluting of shareholders’ stock, maybe it’s…
    I just don’t get a good feeling.

  • Comment number 33.

    If the Chief Executive cannot convince his fellow directors to take up their own rights issue how on earth can he persuade ordinary shareholders to?

  • Comment number 34.

    Seems to me that UK companies are seen merely as investment vehicles.
    And of course the CEOs see it as their right and job to use these vehicles to generate wealth for themselves.
    I suspect we are going to hear more about entrepreneurial skills in the months to come.
    Oh come on. Get real. These "entrepreneurs" are just spivs.
    The word "entrepreneur" has been well and truly hijacked.

  • Comment number 35.

    I thought the biggest reason successful business' failed was due to over expansion.

  • Comment number 36.

    I think that a big part of the underlying problem is to be found in an analysis of "Why do we want to be the biggest in the world?"
    Corporate egos of Chairpersons and CEOs? Tick
    Worry that being small will mean you might get swallowed by a/n other? Tick
    The short term demand of the stock market to always see shares as only delivering value if a company is "growing"? BIG TICK
    Time was, profits were delivered back to shareholders as dividends - I know, they still are, sometimes - however, dividends are only paid out once or twice a year. The stock market wants to "trade" these shares, churning them continually, so it can rake off its transaction charges.
    But it can only do that efficiently if there is a volatility guaranteed by instant purchase/sell cycles, and to feed that they need more than a quarterly report. They need to see "strategic acquisitions and growth" at almost any cost - until the cost eats them.
    My stepfather worked for GEC for 40 years - it was not a spectacular company, but it was safe and had a couple of £billion in cash in the bank. Weinstock Snr left, and an "exciting" new management team came in to the plaudits of the stock market - and destroyed GEC in a matter of months. The dividends my stepfather received from his small shareholding were part of his retirement, and are now gone forever.
    I see big parallels here - solid, dependable, and suddenly egotistically looking to grow by expanding into a market in which it has no track record (GEC into telecoms, Pru into Far Eastern insurance markets).
    When you are No1, there is nowhere to go but down. Whatever happened to well run companies that just make a nice profit?
    If all we ever chase is growth at any cost, we are doomed to fail in a world bounded by finite limits. But the pressure to grow comes mostly from corporate shareholders who demand the stellar, the spectacular, and if they don't see it they can demand a head on a plate - and then wonder why the next head has sold the plate out from under them

  • Comment number 37.

    "these big investors are neither confirming or denying their voting intentions"

    This should read "neither confirming NOR denying their voting intentions"

  • Comment number 38.

    Interest rates need to rise to a sensible level , in order to bring back the much needed investors confidence. Investors will buy more GBP assets to get better returns. The currency will regain some strength. A strong currency will bring down the import prices of essential commodities which will help lower the inflation rate. Low inflation will help improve consumers confidence.The economc activities will improve as a result.

  • Comment number 39.

    #38. sammy wrote:

    "Interest rates need to rise to a sensible level"

    I agree, for a whole host of very good economic reasons.

    But what I find astonishing is that the 200 economists (and their boss) at the Bank of England are not saying so and further that they seem to have completely failed to understand the role of interest rates in bearing down on inflation.

    I wonder if they know any economics at all or perhaps they have no integrity?

    Certainly their boss seems curiously bereft of sanity. I know the matter has been raised with him and indeed his predecessor as I did so on several occasions with an outline of the economic reasons on every occasion.

    All I got back was that all he had to bother about was the CPI - It sounded like the response of a 'jobsworth', but haven't we, the people, got the right to expect some minimal level of professional expertise, standards and integrity from such an apparatchik!

    I think we have a duty to demand economic expertise from the Governor - and not a person whop fro all the world seems to act like some gormless poodle!

  • Comment number 40.

    ......and now Pru is renegotiating........I sense that this whole deal is becoming a bit of a dead duck.If it does not go ahead then presumably we can look forward to be mass resignations by those directors promoting the scheme

  • Comment number 41.

    Obviously, any link with AIG may be a poisoned challis?

    However, due to endless, multiple and lucrative 'transaction' charges and financial lawyers' 'participation' we know that broke and humble pensioners will not be driven in a limo' to one their multiple addresses with heavily loaded bags full of cash?

    By the way, all 'average' HYS posters are fully aware of banker's and trader's PR company's postings and their streams of progaganda too on all sites?

  • Comment number 42.

    If the latest is to be believed the deal could be all over unless the price is dropped.

    http://news.bbc.co.uk/1/hi/business/10194024.stm

 

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