DEALWATCH: Prudential Factor Adds To The M&A Go-Slow

16th Jun 2010 17:22

By Jessica Hodgson Of DOW JONES NEWSWIRES LONDON (Dow Jones)--The collapse of U.K. insurer Prudential PLC's (PRU.LN) $35.5 billion bid to buy American International Group Inc.'s (AIG) Asian operations has dramatically underscored to boards and shareholders the risks of big, transformational deals. While deals with clear strategic logic and limited risk continue to get done, executives are wary of embarking on acquisitions, mergers or IPOs that seek to radically shift a company's business model, or with significant financial risk. This attitude is amplifying an existing caution on economic volatility prompted by the sovereign debt crisis, leading to inertia in deal-making. "The boardroom is becoming a more cautious and risk-averse domain," said Barry O'Brien, a partner at Freshfields, Bruckhaus, Deringer, who focuses on M&A. "Before giving the go-ahead for a big deal, a board is going to want much greater assurance that shareholders aren't going to block it." Global M&A value, in the second quarter of 2010 is, according to preliminary figures from Dealogic, at its lowest level for five years, including the years of the financial crisis, at $483 billion, down 13.5% from the year-earlier period. Deal-makers say M&A is primarily being crimped by economic uncertainty. But the Prudential debacle has added a layer of fear to the equation. Prudential in early June called off its attempt to buy AIA after failing to negotiate a lower price for the deal. Shareholders in the U.K.-listed insurer had become increasingly opposed to the deal after it was launched in March due to several factors, primarily a GBP14.5 billion rights issue planned fund the deal, concerns over a regulatory challenge and worries that Prudential may be over-paying. Some shareholders have since called on Prudential's CEO, Tidjane Thiam, to resign, arguing they weren't adequately consulted on whether they supported the deal. Because companies are, under U.K. law, restricted from providing specific detail on deal plans to individual shareholders before formally launching deals, they are tending to err on the side of caution, bankers say. Several commentators have drawn comparisons between Prudential and Royal Bank of Scotland Group PLC's (RBS) ill-starred acquisition of ABN Amro in 2007 for about GBP10 billion, a deal that became a poster-child for what can go wrong when institutional investors and board members fail to face investment bankers. The board of RBS was criticized for not questioning the logic of the deal, which was followed by a GBP12 billion rights issue to shore up the bank's capital reserves, the U.K. government ultimately taking control of the bank, and record write-downs. Unlike RBS, Prudential's core business remains strong and its management and board--at the time of writing--remains in place. But the comparison has underscored the necessity for management teams in ensuring that they have the same vision for the company as shareholders. "I think what Prudential highlights is the importance of securing the support of your shareholder base," said Selina Sagayam, a partner at Gibson Dunn. At the beginning of 2010, one banker said, there was an optimism that an improving economic situation would prompt companies to break out of this cautious mindset. Prudential was a key litmus test for whether the optimism was more than a temporary blip, this banker said, and the outcome wasn't happy. "In 2008 and 2009, institutions were the king makers and corporates became acutely aware of that fact," this banker says. "Prudential has been a very visible reminder that the tide hasn't really turned yet. The best advice banks are giving at the moment is to be fairly cautious." Prudential is a potent symbol of investors pouring cold water on transformative zeal. But the IPO market this year also underscores that economic instability and corporate caution remain a dominant theme. Last week Ferrous Resources Ltd., a Brazil-focused iron ore company, said it has decided to postpone a share listing on London's main stock exchange due to unfavorable market conditions. Other significant IPO cancellations this year include German real estate company GSW, Russian-based fertilizer producer UralChem Holding PLC. and Travelport. Several bankers say they think that the broader macro-economic uncertainty, as opposed to corporate governance, is the main reason for companies' reluctance to pull the trigger on big deals, but they say that shareholder confidence is key. "M&A is difficult to get done anyway, and it relies on some earnings visibility, agreement on valuations and access to capital and borrowing markets at what the board thinks are reasonable rates," said Mark Warham, co-head of European M&A at Barclays Capital. But, he added: "It also requires a confidence among boards that they have a common view among their shareholders about what happens next." "I think ultimately [the Prudential deal] was mostly about value, rather than communication or corporate governance," another senior M&A banker said. "This deal [Prudential] was an extreme transformational deal, which tried to shift the company into a radically different economic footprint. But if the growth projection for Asia had been certain enough, shareholders would have backed it." But the Prudential situation is likely to be front of mind for any companies who may be running numbers on BP PLC (BP), the beleaguered energy giant. Several bankers, on condition of anonymity, said privately that BP's peers are likely to be examining the possibility of bidding for the firm as its market capitalization has almost halved since the Gulf of Mexico oil spill. But two said that concern over the potential liability from the spill, and shareholder caution, will be an inhibitor. This isn't to say some companies aren't making bold bets. In recent weeks, News Corp. (NWS), which owns Dow Jones, publisher of this newswire, has offered to acquire the 61% of U.K. satellite broadcaster British Sky Broadcasting Group PLC (BSY) that it doesn't already own, and insurer Resolution Ltd. (RSL.LN) has agreed to buy some of the U.K. life-and-savings activities of French insurer AXA SA (CS.FR), a deal that dramatically increases Resolution's size and itself involves a sizeable rights issue. In particular, some bankers have pointed out that hostile M&A is a prominent feature of the current landscape. In recent weeks, Emerson Electric Co. (EMR) launched a hostile bid for U.K. power system maker Chloride Group PLC (CHLD.LN), while Telefonica S.A. (TEF) is currently engaged in a bid to woo shareholders in Portugal Telecom (PT) to accept its bid for Vivo Participacoes S.A. (VIV), a Brazilian mobile operator in which Telefonica and Portugal Telecom each own half. Hostile M&A can thrive in choppy markets, one banker said, because it allows companies to "exploit the dislocation between boards and shareholders," one banker said. Because many shareholders at the moment place a premium on cash, bidders are able to win them around to deals not backed by a target company's board. -By Jessica Hodgson; Dow Jones Newswires; +44207 8429373; [email protected]. (END) Dow Jones Newswires June 16, 2010 12:22 ET (16:22 GMT)