Empire building can be a fine pursuit and is the reason why some of the world’s great companies are the money-making, dividend-paying growth vehicles they are today.
However, there does come a time when empires overreach themselves, and when overambitious leaders need to be checked, or in the end shareholders will ultimately get burnt. So, with the memories of the destruction in value for RBS shareholders still fresh in their minds, fund managers have pulled the plug on Prudential’s attempted purchase of AIA.
From the Prudential’s point of view, it wanted to dominate the Asian market with one bold move. However, investors – most vocally Neptune’s Robin Geffen – saw too much risk in the deal, not least because, despite the huge price tag, the acquisition gave no access to either the Indian or the Chinese markets. While the financial repercussions of the failure of the deal is set at an eye-watering £510m, the potential costs of a strategically vague and expensive failure could have been far higher.
From an end investor’s point of view, it is reassuring to see fund managers standing up to company boards and saying no. This is what they are paid for, and the degree of coordination shown has been refreshing. While it is not the job of shareholders to run a company, they should be able to act as a meaningful sounding board when it comes to major strategic issues.
Geffen, who acted as a rallying point for disaffected investors, came out of the situation with a high degree of credibility. However, he pointed out it was the ability of investors to act in unison that forced AIG and Prudential back to the negotiating table.
As Geffen said in the immediate aftermath of the deal’s collapse: “There are some lessons to be learnt, namely for company management to speak with their shareholders early on in shaping any deal, listen to what they have to say and be prepared to face a united force if the deal is deemed contrary to investor interests.”
And while the managers do the talking and should, rightly, take the credit, it is worth remembering the end investors they represent often have relatively small savings pots with which they are planning their retirements. Risky empire building does them no good if it fails.
This kind of unified engagement may not happen each time there is a controversial deal, but the bar for investor engagement has now been raised and company management can no longer simply assume shareholder support as a default.
