Professor: Market Volatility May Prompt AIA IPO Sooner, Rather Than Later

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June 15, 2010 Tuesday 05:53 AM EST

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Professor: Market Volatility May Prompt AIA IPO Sooner, Rather Than Later

Rebecca Ng

HONG KONG

With the derailment of U.K.-based Prudential plc’s acquisition of AIA Group from American International Group, a possible independent Hong Kong listing of AIA returns as a possibility in the second half of 2010. AIG will likely advance the share flotation of AIA before any market deterioration, according to Hong Kong-based market watchers.

“I believe AIG will push forward its initial public offering in Hong Kong sooner, not later, while it can still negotiate possible sales deals with other potential buyers,” Arthur Hau, associate professor of the department of finance and insurance at Lingnan University of Hong Kong, told BestWire.

The timing of AIA’s IPO is “crucial” because “any stabilization of the European financial market may lead to a reversed global interest rate pattern, while an unstable global financial market serves to suppress stock prices,” said Hau. “Both of them have a negative impact on the funds that AIG can raise by letting go of AIA, one of its few remaining cash cows.”

No Winner?

If Prudential is the “loser” of the deal, equity analysts have speculated that AIA will be the final winner due to potential rising market revaluation amid the chaos. Some even said the Hong Kong Stock Exchange will be the winner, as the Hong Kong listing of Prudential and the possible Hong Kong listing of AIA will both stimulate the stock trading in the city.

Hau, however, said he believes “there is no winner in this failing deal.”

“Prudential has lost money, time and confidence from its existing shareholders. AIG has lost a good opportunity to turn its profitable business into cash to pay back the bailout money to the U.S. government. The failed AIA sale will sooner or later show some negative impact on its customer and employee confidence towards the future of the company in the Asian area,” said Hau.

He added that “AIG is running the risk of not being able to get a better deal by finding a new buyer or by conducting an IPO for AIA, given the recent concerns of the financial market in Europe.”

Hau said Prudential’s executives are responsible to their shareholders and AIG’s executives are responsible to both their shareholders and U.S. taxpayers. He said “it is hard for AIG to lower its sales price of AIA” that was agreed upon several months earlier.

Because the timing of the closing of the Prudential-AIG deal was “far from perfect,” Hau said if the deal had closed a few months earlier when the European financial market was in a better shape, the transaction might have received more support from Prudential’s shareholders and “might have gone through more easily.”

“Perhaps, we should wait and see whether AIG actually has some better planned or unplanned alternatives than accepting a received offer from Prudential,” he said.

All About Timing

The finance and insurance expert disagreed that the Prudential-AIG deal was too ambitious when it was negotiated last year, at a time when the global economy seemed to be moving out of a recession at a “rather fast” pace.

“I believe the key reason for the failure of the deal is its timing,” said Hau. “As the credit and investment markets in Europe worsen because of the potential insolvency of some European countries, it is only reasonable for the shareholders of Prudential to refrain from supporting a takeover bid that may raise the short-term liquidity risk of the company.”

Hau also said that “the possibility of a double-dip recession foreshadowed by the recent financial events occurring in Europe has perhaps persuaded the shareholders not only that Prudential needs to be more conservative in its investment strategies, but also that it should bargain for a better deal given the recent under-performance of the global stock markets.”

M&A Strategies

The Prudential-AIG deal is a “very special” case that not only reflects the financial distress of a single company, but also circumscribed room to maneuver caused by global financial instability and uncertainty, noted Hau.

Every merger and acquisition deal is unique and the outcome of the Prudential-AIG deal should not be seen as an indication of future deals, said Sharon Khor, head of insurance of Greater China at consultancy Accenture. There should be some good lessons learned from this experience, she said.

“Personally, I doubt the outcome of this deal will have any material impact to the Asian life insurance market,” said Khor. The insurance consultant also expects to see “the same positive growth trajectory in Asia” and insurers will continue to invest in this market.

“I will not preclude any possible future M&A activities in this region despite the Pru-AIA outcome. Insurers in Asia, including domestic and foreign players, will continue to be very competitive and aggressive for both organic and inorganic growth when opportunities arise,” Khor noted.

Hau said insurance companies “may be more cautious in any M&A transaction that involves the commitment of a huge amount of liquidity or short-term resources.”

“Communication with shareholders” will become a major concern of insurance company executives when M&A decisions are to be finalized within a short period of time, he added.

Regulation Change

The failure of the deal raised market concerns that it might lead financial and insurance regulators, especially those in Asia, to tighten their restrictions on insurers’ solvency, cross-border M&A transactions and rules on market competition.

Khor ruled out this possibility and does not believe the deal alone will lead to any major regulatory change. Hau said the solvency of insurance companies has been “quite well-scrutinized by almost all regulators in Asia, similar to other advanced countries.”

“Unless the parent company of an insurer is also tightly regulated, financial problems similar to that encountered by AIG cannot be avoided,” said Hau, who doesn’t believe insurance regulators should tighten insurance-related regulations that “most likely cannot regulate” the operations of parent companies.

“Neither do I believe that financial regulators will or should tighten their restrictions on cross-border M&A deals,” he said, explaining that as long as a deal fully complies with existing financial regulations and no investor interests are potentially sacrificed, “tightening restrictions on M&A deals only makes the financial market less efficient.”

Even though Hong Kong will be “more and more affected by some form of anti-trust regulations,” according to Hau, regulators will not be worried about the change in the degree of competition in the insurance industry due to any M&A activities.

The insurance market is “still sufficiently competitive” in Hong Kong and in other Asian markets that even banks or insurers with large market shares are unable to gain monopoly profit or engage in any form of price fixing, noted Hau.

Prudential had proposed its US$35.5 billion acquisition of AIA on March 1. In an effort to promote the deal, Prudential Chief Executive Tidjane Thiam had said Prudential’s embedded value would go from being 38% Asian to 66% Asian. Its earnings share would rise from 22% Asian to 58% Asian (BestWire, March 1, 2010). To fund the transaction, Prudential launched simultaneous IPOs of its shares on the Hong Kong and Singapore stock exchanges on May 25, in addition to the issuance of a rights issue to its existing shareholders.

By the end of May and prior to Prudential’s annual general meeting June 7, less than 75% shareholders of the group supported the deal, while those who were against the deal claimed the transaction amount was expensive, which led the management to reduce the proposed transaction price by 14.4% to US$30.375 billion and renegotiate the transaction terms with AIG. But AIG turned down the revised acquisition proposal on June 1, which forced Prudential to call off the deal on June 2.

(By Rebecca Ng, Hong Kong news editor: Rebecca.Ng@ambest.com)

June 16, 2010

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