On May 17, 2007, at its annual shareholders’ meeting, a private
shareholder asked David Clementi, 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, Mr Clementi, 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 17 May, 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. Mr Thiam 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 its shareholders to either abandon it or
renegotiate its terms. Last week, RiskMetrics, the proxy g6adviser, wrote that
‘a full price, integration risks and ambitious targets that barely meet the
cost of capital do not make a compelling combination.’ It recommended that they
reject the proposal.
In May, Robin Geffen, managing director of Neptune Investment
Management, which owns 0.2 per cent of Prudential shares, began actively
organising 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 per cent of Pru’s shareholders.
Another shareholder, David Cummings, head of Investments at
Standard Life Investments, which controls about 2 per cent of Pru’s outstanding
shares, said, ‘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 per cent 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.
Vote of no confidence
Shareholders may bear an imperial CEO who has an impeccable
track record a la Jack 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. 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.
