Earlier this week the UK insurer Prudential finally decided to abandon plans to buy AIA, the Asian business of US insurer AIG. Back in March the Prudential had announced that it would be paying $35.5bn for AIA but it failed to convince the City that this was a fair price. As a result the Prudential set about trying to re-negotiate a reduction in the price to nearer $30bn in the face of severe shareholder opposition to the original deal. On Tuesday AIG made it clear that it would not "not consider" this lower price which killed the deal stone dead. Despite the closure on this deal the Prudential still faces some £450m in costs directly linked to the collapsed deal. This includes a substantial break fee of about £150m. Not surprisingly the company's shares were sharply marked down. The company faces an uncertain future with the need to carry out an urgent review of all its relationships with investment bankers and commercial lawyers. In addition the company's whole business strategy has to be called into question. The main rationale for such high profile mergers is normally that one plus one equals three due to the synergies and other related benefits. In this case the investors concluded that one plus one might not even equal two! The lesson from this failed transaction is that it could spell the death of these global mega deals at least while financial markets remain so risk averse.
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Kevin Boakes
- About Kevin Boakes:
- I used to work in the City but gave it up in the late 1980s when we had our first child. The hours were not too compatible with a good family life! Since then I have taught Finance and Financial Markets at Kingston University. In addition I have acted as a consultant to a number of Investment Banks. My great working passion is trying to explain complex financial market terms as simply as possible. I also like to make it interesting by relating it to the real World. I wrote the book with the aim of showing lots of other people that Finance can be interesting and accessible. I hope you like it!
1 comment:
Today there is still financial risk; there is a lot of financial rationing. The investors of Pru are not confident that this deal with AIA is good for its company. If this proves to be a loss-making decision then shares will go down as a result, perhaps investors are more worried about how much dividends they will receive, as the money will likely come from residual profits. So really it’s a case of, if this deal can maximise purchasing value, which the city believes not.
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