Ordinary Gweilo

A year or so ago, Prudential (a British insurance company) apparently tried to buy 49% of AIA (an Asian insurance company based in Hong Kong and owned by AIG). This seemed doomed to failure for at least three reasons: they didn’t offer enough; they didn’t have the money; and how was it going to work if they owned 49% of their biggest competitor in several markets?

Now they are back in the toy shop and even more determined to get that shiny new plaything (Prudential gambles on Asia with $35bn deal):

Prudential, Britain’s largest insurer, shook off the gloom that has dogged the City for the last two years with a record-busting financing package to fund a £23bn agreed takeover of Hong-Kong-based American International Assurance.

The acquisition signals a major push by the insurer into China and the Far East, where AIA was its main rival, with 20 million customers.

There’s that pesky problem again – in many markets Prudential and AIA are fierce competitors.  No-one seems sure how that will be resolved:

It was unclear how the company would operate after Thiam said the AIA brand would remain. AIA has 320,000 tied agents who have long seen the Pru’s 400,000 employees as their main rivals.

Anyone who has been through any process where your company gets acquired (or "merged"), will know the problems this creates, especially when the acquirer is much smaller than the company being acquired -  and it’s a well-established fact that most mergers destroy value rather than creating it.   Hostile acquisitions of “people” businesses are particularly risky – and you have to assume that everyone in AIA wanted an IPO rather than to be taken over by a rival.  This was a deal done by AIG and the US government, both of whom want as much money as possible as soon as possible, rather than by the management of AIA.

So there must be a fair chance that a significant number of agents may leave rather than work for Prudential, and you can be sure that other insurance companies will be watching this carefully to see how they can take advantage of the situation.

Prudential is undoubtedly a big name in the UK, and fairly well known in Asia, but AIA is much better known and has been in these parts far longer.  So there must be an argument for the new company being called AIA.  This would also remove the confusion with Prudential Inc., an unrelated US company, and after all the advertising that has been done in preparation for an IPO, it might be easier to issue new shares in Hong Kong under the AIA name.

But it almost certainly won’t happen.  Prudential’s top management are obviously feeling very pleased with themselves right now, and the last thing they want is to lose any of the glory.  Whether this will turn out to be a good deal for shareholders (whose interests the directors are supposed to be concerned about) is another matter. 

Prudential shares fell 12% to 530p yesterday against a slightly higher FTSE 100, while AIG shares were up 6% at $26.30.

"(The deal) is going to be enormously dilutive," said ING analyst Kevin Ryan. "No one knows exactly what AIA contains or how profitable it is, or how it overlaps with Pru’s existing businesses."

Pru chief executive Tidjane Thiam rejected concerns that profits could be jeopardised. He said: "Transformational is an overused word, but this deal is truly transformational."

Well, yes, he would say that, wouldn’t he.  Oh, and thanks to the SCMP for their insightful coverage of this story (one article from Bloomberg, since you ask).