This week on Street Talking in NEXT, I suggest that a lack of fuller faith in the ability of Tidjane Thiam, the CEO of Prudential PLC, the UK insurer, to ‘deliver the goods as and when due’ and not rich valuation multiples was the real issue in the company’s failed attempt to acquire, AIA, the Asian insurer owned by AIG. My argument hinges on my view that after CEOs are appointed, they first need to win the trust of important shareholders before embarking on any daring strategic initiatives, moreso in these testy economic environment.
On May 17, 2007, at its annual shareholders’ meeting, a private shareholder asked Sir David Clementi, the former chairman of Prudential, the UK insurance giant, if the company had ‘the strategy, strength and scale to stave off a breakup or a merger?’ In his response, Sir David, a former deputy governor of the Bank of England, assured the shareholder that Pru had the ‘strategy, scale and we have the strength.’ But he did sound a note of caution. ‘Looking ahead, we will return to these structural issues. Life changes and businesses change. We will return and we will do so against the one main yardstick [we use to] operate the group, namely shareholder value.’
Exactly, three years later, on May 17, 2010, the group launched an audacious $21 billion rights issue, the second biggest ever in sterling, to fund its planned $35.5 billion takeover of AIA, the Asian business operations of AIG. Piloting the deal was Prudential’s chief executive, Tidjane Thiam, ex-McKinsey partner and one-time Ivorien government minister, who was named CEO in October 2009. He had promised shareholders that AIA will be worth $60 billion in two years, that is, nearly double its purchase price.
Since news of the deal first leaked in February, Prudential had been under a lot of pressure from a good number of its shareholders to either abandon it or renegotiate its terms. Last week, RiskMetrics, the proxy adviser, wrote that ‘a full price, integration risks and ambitious targets that barely meet the cost of capital do not make a compelling combination.’ Needless to say, it recommended that they reject the proposal.
In May, Robin Geffen, managing director of Neptune Investment Management, which owns 0.2% of Prudential shares, began actively organizing shareholders to oppose the acquisition. On www.prudentialactiongroup.com, a special purpose website, he created to mobilize dissident shareholders, the manager claimed to have won the backing of about 20% of Pru’s shareholders.
Another shareholder, David Cummings, head of Investments at Standard Life Investments, which controls about 2% of Pru’s outstanding shares, stated that: ‘We and other shareholders believe the price is too high and the financial case for the deal hasn’t been particularly well articulated. When you’re raising £14 billion one needs a lot of strategic and financial precision. We are sceptical on price and we are not clear in terms of the strategy.’ It gets worse.
Peter Lees, Head of UK Equities at F&C Asset Management which owns just under 0.7% of the company pointed out that while it ‘had no issue with the Prudential’s strategy of expansion or acquisition per se and is broadly supportive of the rationale for developing its presence in Asia,’ it was uncomfortable with ‘the economics of the deal which leave no margin for error in the delivery of revenues and cost synergies.’
On Wednesday, Prudential announced that it was walking away from AIA. The insurer obliquely implied that the refusal of the board of AIG, owners of AIA, to accept a lower price was its reason for exit. How much of that is damage control spiel and how much of it is delusion should be clear to all. Prudential’s shareholders, not the AIG board, defeated the deal.
From the start, there were serious questions when the shareholders who voiced strong reservations about the transaction were not the typical ravaging ‘locusts’, that is, short-termist hedge fund managers. On the contrary, they were long-term shareowners who until now had supported the board including BlackRock, which holds 6%, Legal & General, which holds 4% and Fidelity which holds 2% of the shares.
Shareholders may bear an imperial CEO who has an impeccable track record a laJack Welch of delivering value; an imperious Caligula does not stand a chance. Since the termination announcement, powerful shareholders have called for Thiam’s departure. In my honest view, their rejection of the deal was really a vote of no confidence on Thiam’s leadership.
Complexity, integration, pricing, timing, valuation and all of that are red herring. Investors were not ready to give the Pru CEO a blank cheque. Despite his illustrious antecedents in management consulting he is still a ‘suspect quantity’ in the capital markets. The ability to deliver shareholder value is not just an objective extrapolation from strategy, scale and strength. It is a direct function of a CEO’s tested and tried reputation for stirring those three ingredients into a sweet sauce.
Back in March, when he briefly considered accepting an invitation to the board of Société Générale, the French bank, Jane Coffey, head of UK equities at Royal London Asset Management, which manages Pru shares, advised Thiam that he really ought to concentrate on ‘his day job.’ Shareholders were not convinced then that he had the bandwidth to moonlight just yet. He would nod off on his 9-to-5 run. Even with the excruciating pain of $652.5 million in breakup fees, they have repeated it again loud and clear, ‘show us you can crawl before running.’ So while Prudential has the S-Factor, its CEO still needs more time to make his bones. I mean, X-factor.
The original article can be read here on the NEXT website.
In the following Bloomberg TV report, the power of shareholders to influence and derail deals perceived as counter-value is discussed. The video was shot on June 3, 2010:
In this Bloomberg TV interview, Tidjane Thiam, Prudential’s CEO accepts responsibility for the aborted purchase of AIA. The video was shot on June 4, 2010:
Some relevant presentations to investors by Prudential PLC are shown below:
Prudential PLC Proposed Acquisition of AIA – Presentation to Analysts – March 1, 2010
Prudential PLC – 2009 Unaudited Results and Acquisition of AIA – March 2010
Prudential PLC Proposed Acquisition of AIA – Presentation to Analysts – May 17, 2010
On June 4, 2010, the same day this article appeared in NEXT, the Financial Times published the following story with an instructive quote by :
One cannot help noticing how Niyi Meka Olowola, Oando's Head of Corp Comms, is nodding in approval. Maybe Goldman Sachs can learn lessons.04:47:49 PM January 25, 2012from HootSuite
It's at times like these companies praise heaven for media-savvy CEOs.Among Nigerian business leaders,Wale Tinubu, is easily among the best.04:46:01 PM January 25, 2012from HootSuite
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