WHAT a mess. Prudential’s entire strategy lies in tatters, its supposedly transformative $35.5bn bid for AIG’s Asian operations all but over. The firm’s last-ditch attempts at cajoling the US government, AIG’s majority shareholder, into cutting AIA’s price never got off the ground. The deal’s demise is a victory for shareholders and London’s long-suffering institutional investors, who have at last had the guts and foresight to block a value-destroying mega-deal; but it is a bitter, personal humiliation for Tidjane Thiam, the Pru’s chief executive, and Harvey McGrath, the firm’s chairman. The idea of turning the Pru into an Asian powerhouse – an HSBC for the insurance world – wasn’t a bad one but the price of the deal was ludicrously high. A business is owned by its shareholders, not its managers; unfortunately, in this case as in so many others, a hubristic, empire-building CEO started to act as if he owned the place. While Thiam is a charming, self-effacing and highly intelligent man, some of his team conducted themselves in an arrogant and often incompetent manner, angering shareholders as well as the Financial Services Authority (FSA), which forced the Pru into an astonishing climbdown over capital requirements.
The FSA was clearly desperate to establish that it had changed since the bad old days when it allowed RBS’s capital to fall to rock-bottom after its purchase of ABN Amro – but Thiam should have seen this coming and been more respectful of the regulator’s authority. The fact that he was planning to accept a directorship at Societe Generale in the middle of all of this was the last straw even for his supporters, who couldn’t understand how he could have been so badly advised.
Given the turmoil in which the Pru has now been plunged and the dramatic thumbs down given to its strategy, the only right and proper outcome is for Thiam and McGrath to resign, preferably immediately.
Michael McLintock, the excellent boss of the Pru’s M&G Investments unit, should become the interim (and possibly permanent) chief executive, while James Ross, the senior non-executive director, should become acting chairman. Their mission should be to ensure that the Pru pulls through the next few weeks, to hammer out a robust strategy for growth and to mend fences with institutions.
Perhaps more than anything else, this sorry affair has seen a rare triumph of buy-side firms – fund managers and others investors, aided by brave, independent research houses such as Hong Kong’s CLSA – against a sell-side coalition of 30 investment banks tasked with the fundraising.
The received wisdom was that the power of the banks – and the vast amount of money they were promised to underwrite the deal – was such that the ordinarily lily-livered institutions were bound to surrender. Their refusal to do so marks an important shift in the balance of power in the City.
WHY MICHAEL FALLON IS BEST
With so many dramatic changes being planned to the way the UK economy is managed and regulated, the House of Commons’ Treasury Select Committee will soon take on a renewed importance as a watchdog and check on the government and Bank of England. Michael Fallon, Tory MP for Sevenoaks, deserves to be its new chairman. He is financially literate, economically sound and spent years as an entrepreneur and director of a top City firm. Let us hope MPs vote for him at next week’s elections.