M&A bankers are a uniquely optimistic breed. At the start of March, when UK insurer Prudential announced its agreement to take over the Asian operations of AIG in a deal that will double its size and require the largest ever UK rights issue to finance it, they were delighted. Other insurers will have to respond, they argued. Those global insurers now lacking scale in non-Japan Asia, which everyone agrees will drive global GDP growth for the next 20 years and where insurance penetration is much lower than in developed markets, might have to launch their own deals.
But all this is simply to ignore something very startling and worrying. No matter how strong the industrial logic of the deal, in the first hours and days after the news broke the Prudential share price fell by within a fraction of 20%. By the end of March, after a month of explaining the transaction in more detail to investors, it was still close to 12% down from where it had stood at the end of February.
It looks as if the company has taken careful aim and discharged both barrels into its own feet.
Chief executive Tidjane Thiam has more than just Prudential shareholders to win over. AIA had been working towards an IPO and many executives would no doubt have preferred to run their own listed company than work for someone elses. The day after unveiling the deal, Thiam was off to Asia to try to talk them round, leaving investors to chew matters over.
The Prudentials still-new chief executive at least deserves some credit for his honesty in admitting that he has previously seen rivals engaging in M&A as a chance to steal their market share. Investors werent thanking him for it though. The execution challenges are considerable and the Prudentials chosen multi-brand strategy does not make matters simple, even if it is the right approach. In Malaysia, to pick one example, Prudential and AIA run two companies each. How do you reconfigure those to improve the efficiency of the product push across various sales forces?
The Prus share price was in trouble from the moment chairman Harvey McGrath described the deals as truly transformational.
The acquisition and associated $21 billion rights issue mark a new step past the crisis for large financial companies. Equity investors are being asked to stump up on huge new supply to accommodate grandiose management ambitions that might take years to achieve, if they ever are. Investors in UK rights issues are painfully reminded of the RBS offering to fund its part of the ABN Amro acquisition, more than they are of the recent equity raisings in 2008 and 2009. This is different from propping up a fundamentally sound company whose share price has been beaten down in an industry-wide convulsion.
Bankers should pay close attention to the hostility of investors reaction, which clearly caught Prudential off-guard. Stumbling at the very outset makes it tough to get such a big and complex deal back on track.
This comes just as banks themselves are beginning to look past the immediate banking system and financial market crisis at possible M&A activity. Barclays is considering a deal for a US retail bank, sources there tell us. One of the Prudentials own advisers, HSBC, has declared its Asian ambitions by relocating its chief executive there. Michael Geoghegans first three years at the helm of the bank have been entirely taken up by managing through the crisis. Now sources at HSBC wonder whether he wants to make his mark with a big acquisition. If he does, even assuming it will be in Asia, he can expect a lot of questions about Household.