Prudential UK Couldn’t Overcome Stakeholder Worries About AIA Bid

Sparked by shareholder and regulatory concerns, the collapse of Prudential plc's bid to acquire AIA Group Ltd. leaves questions about the relationship of Prudential's top management with its shareholders.

Tidjane Thiam, Prudential's group chief executive, was unable to pull off his ambitious plan buy AIA from American International Group, but the failed deal is unlikely to put Thiam's position in jeopardy, at least for now, according to Vasilis Katsipis, general manager of analytics at A.M. Best Co. in London.

"It's one of the few times that we have seen the shareholders of a U.K. company not following the recommendations of its CEO and its board," Katsipis said.

The AIA acquisition drive was the dominant theme of Thiam's as CEO of Prudential. Thiam replaced Mark Tucker as CEO last September, after Tucker announced his resignation following Prudential's announcement of a 1.34 billion pound net loss for 2008. Thiam left Aviva Europe to become Prudential's group finance director in October 2007.

The announcement of the deal's demise came a day after Prudential said it failed to convince AIG to accept a revised transaction price of US$30.38 billion, about 14.4% less than the original acquisition price of US$35.5 billion proposed in March (BestWire, June 1, 2010).

Had the acquisition gone ahead, Prudential's focus would have shifted outside the United Kingdom, making the group "a very Asia-heavy company," said Katsipis. Asia, which produces a third of Prudential's business, is the group's fastest-growing region, he said.

In promoting the deal, Thiam had said Prudential's embedded value would go from being 38% Asian to 66% Asian. The group's earnings share would rise from 22% Asian to 58% Asian (BestWire, March 1, 2010).

The enlarged company would have had more than 30 million customers and 600,000 agents, and would have been the market leader in Hong Kong, Singapore, Malaysia, Thailand, Indonesia, the Philippines and Vietnam.

Asia "is actually a very significant part of the group," Katsipis said. "And not doing the deal doesn't diminish that."

So sharp would the tilt toward Asia have been as a result of an AIA acquisition that the Financial Services Authority, the U.K. insurance regulator, had been concerned about the effects of a deal on U.K.-based shareholders, said Katsipis.

Barrie Cornes, an insurance equity analyst at Panmure Gordon in London, said Prudential's management "will spend a period re-engaging with the shareholders" and identifying future strategies.

Cornes had expressed misgivings about the deal. In a research note issued on May 6, he had warned: "We view Pru as vulnerable should the proposed acquisition be pulled."

Investment research firm Morningstar UK expressed approval at the failure of the acquisition.

"We were concerned that Prudential may have been pursuing an expensive and risky growth strategy and, on balance, view the withdrawal of the offer positively for Prudential's shareholders," Bill Bergman, an equity analyst at Morningstar wrote in a research note.

Katsipis does not expect Prudential to become an unwilling takeover target as a result of the failure of the deal. He does not regard the present climate as conducive to "mega acquisitions." He also discerns some reluctance on the part of shareholders in the United Kingdom to see their capital used to fund major deals.

Among other U.K. life insurers, only Aviva can offer the same kind of international portfolio as Prudential, Katsipis said. Not only is Aviva not interested in huge acquisitions, but it has paid more recent attention to the emerging markets of Eastern Europe than it has to the Far East, he said.

Katsipis doesn't criticize Prudential management for its handling of the AIA bid. "It was always a very audacious move," he said. "It was one that was going to be transformational to the group."

While Prudential might have foreseen the backlash from the shareholders, the group also faced pressure in the form of AIG's planned initial public offering in relation to the AIA entities, he said.

The episode recalled the forced departure of Jonathan Bloomer as Prudential's CEO in May 2005 after a rights issue caused shareholder anger. Reached at London-based insurer Lucida plc, where he is executive chairman, Bloomer said he would adhere to his decision not to speak on the record about his exit from Prudential.

To hear the full interview with Vasilis Katsipis go to http://www.ambest.com/media/media.asp?RC=173821

(By Robert O'Connor, London editor: [email protected])