After the Prudential (PRU) pulled out of its audacious bid for U.S. insurer AIG's Asian business AIA on Wednesday, it looks like Chief Executive Tidjane Thiam will be let off the hook for losing shareholders £450 million in investment banking fees and break clauses (which amount to £150 million).
With large institutional shareholders refused to play ball and said they would vote against the deal to pay $35.5 billion for the AIA assets (a 75% yes shareholder vote was needed), Thiam's team went back to AIG, which is 80% owned by the U.S. Treasury, to ask for a 10-15% reduction in the price. Unfortunately, the AIG board voted down this idea and the Prudential was forced to concede that the deal was no more last week. This was a somewhat surprising result, given the alternative option for AIG is an Asian flotation of AIA with all its uncertainties. However, there were fears that even with a price cut to $30 billion or so, the deal might still have been rejected by shareholders, leaving AIG with red faces all round.
Although the deal to buy AIA's assets looked great on paper in that it would make the Prudential by far the largest insurer the fast growing Asian region with the potential for significant cost cutting through integration synergies, institutions were concerned about the premium that the Pru were paying. The big mistake that Thiam made was to underestimate shareholder resistance and convince key shareholders even before the initial negotiations were finished. The Pru wrongly assumed that with a bit of persuasion after the event, institutions could be brought to the table to stump up the huge capital needed for the rights issue.
So the Pru management has been left with egg on its face and owners of the shares seriously out of pocket. At £450 million, it equates to 18p for every share. Shareholders must be hoping that Thiam drives value in a big way over the next couple of years given his £5 million pay package.
