Pru/AIA: Tidjane Thiam is walking a tightrope. Faced with mounting opposition from shareholders, Prudential’s chief executive is trying to renegotiate his $35.5 billion deal to buy AIA, American International Group’s Asian business. A price reduction would not remove all doubts about the UK insurer’s ambitious expansion. But without a change in the terms, the deal looks dead in the water.
Cutting the price would make sense for both sides. Pru needs the support of at least 75 per cent of investors voting at its shareholders’ meeting on June 7. Assuming 60 per cent of them actually bother to vote, that means the deal could be scuppered by shareholders representing just 15 per cent of the company’s shares. Investors’ main concern about the takeover is the price, which puts a much higher value on AIG’s Asian operations than the market attaches to Pru’s own fast-growing business in the region. A price cut could persuade some investors to change their minds. AIG also has an incentive to renegotiate. True, reducing the price to around $30 billion would give the US insurer less cash and other consideration with which to repay the US taxpayer. But if the deal fails, AIG would have to revive plans for an IPO of the business. In current choppy markets, the valuation is likely to be lower than Pru's offer. Besides, AIG would initially only be able to sell a minority stake in AIA.
Cutting the price would not address all concerns about the deal. Prudential would still face the substantial challenge of absorbing a larger Asian rival while placating local regulators and AIG’s unsettled sales force.
Thiam’s poor handling of the transaction so far has given investors little confidence in his ability to pull that off. Meanwhile, Pru’s board of directors has shown itself unable to rein in its ambitious CEO. Whether the deal goes ahead or not, Pru’s corporate governance needs an overhaul.
So far, Pru shareholders have been presented with an unappealing choice: Support an expensive and risky transaction, or throw the company into strategic and management turmoil. Shrinking the price to around $30 billion could tip the balance of risk and reward back in favour of the deal. But if the negotiations fail to deliver a meaningful price reduction, shareholders should have no hesitation in voting it down.
