Prudent acquisition?

FinanceAsia readers give the thumbs-up to Prudential's record $35.5 billion acquisition of AIA.
The AIA Tower in Hong Kong's North Point district
The AIA Tower in Hong Kong's North Point district

The private sale of American International Group's Asian business is a better option than the blockbuster equity listing that was being planned before Prudential made its $35.5 billion offer last week, according to FinanceAsia readers.

In a poll on our website last week, respondents gave a solid vote of approval to the deal, which will be the biggest insurance-industry tie-up ever and was described by Tidjane Thiam, Prudential's chief executive, as "transformational". That could be an understatement.

The Pru is paying one-and-a-half times its pre-announcement market capitalisation to buy AIA Group, transforming the UK-based company in a stroke from an insurer that earns less than half of its profits in Asia to one that earns 90% from the region. At the same time, Thiam and his management team will also have to pull off a record $21 billion rights issue to finance the deal and an intended Hong Kong initial public offering -- which will make it easier for Asian investors to buy into the deal.

Our readers might not be worried, but the market is less convinced -- a deal as big as this one carries a similarly big risk of failure. Sally Yim, a senior analyst at Moody's, wrote in a report yesterday that the deal still faces huge hurdles, including approval from regulators throughout Asia. The fact that the combined firm will become dominant in some markets -- it will be the leading insurer in Hong Kong, Singapore, Malaysia, Indonesia, Vietnam, Thailand and the Philippines -- could make such approvals difficult to secure.

Both firms sell their products and services through tied agency staff, and bringing the two workforces together poses its own set of headaches. "We believe that the two will have to align their agent compensation structures and product suites," Yim wrote. "The companies will also have to come up with clear strategies to manage and integrate these two large agency forces, which have been head-to-head competitors historically."

Investors voted with their wallets after the deal was announced, driving Prudential's shares down 20% in the following two days. It has recovered slightly since, but the bears are still dominant.

Even so, 63% of respondents to our poll said the deal was a better option for AIA than going it alone, with 32% voting against the deal and 5% saying they weren't sure.

Photo provided by AFP.

¬ Haymarket Media Limited. All rights reserved.

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