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City Comment
When people are scared to confront big issues they make a huge fuss about little things.
The noise which has erupted because Tidjane Thiam, the chief executive of Prudential, has agreed to become a non-executive director of French bank Société Générale is quite absurd.
It matters not one jot whether he takes the job or not.
There is only one thing which should concern Prudential's shareholders right now, and that is whether or not to support Thiam and his £23 billion bid to buy the Asian assets of AIG.
But just as politicians rage about banking bonuses because they can't face the challenge of genuine banking reform, so shareholders rage about this appointment rather than face up to the challenge of the Asian deal.
The fact is that it is the right deal at the wrong price.
The recurring sin of management and investors highlighted every year by the London Business School academic trio of Professors Staunton, Dimson and Marsh is that they consistently overpay for growth.
Of course it makes sense to take out a competitor in one of the world's fastest-growing markets. But Prudential is overpaying so it is highly likely to be another addition to the 75% of takeovers which fail to deliver for the acquiring company.
The truth, however hard the insurer may wish to disguise it, is that Prudential proposes to issue a ton of its shares at around book value to buy AIG Asia at around 1.7 times book value.
This is dilution on a truly heroic scale. As Warren Buffet said when Kraft was bidding for Cadbury, it never makes sense to issue shares too cheaply, but managements do it all the time.
Granted Prudential always overpays for its acquisitions — it has almost become axiomatic in the City as the previous owners of M&G fondly remember — but that does not make it right.
Even the smallest businessman knows you succeed by buying cheap; not hoping that one day you might be able to sell dear.
Arguments from the company that the dilution does not matter because Prudential shares will command a higher rating after the deal has been completed are sophistry and should fool no one.
If a higher rating is what the Prudential board wants, it could achieve the same result far more effectively and £23 billion more cheaply by floating off Prudential Asia as a separately quoted company on the Hong Kong Stock Exchange, or even more simply by selling off its non-Asian businesses here and in the United States so that what is left is in effect Asian.
The money raised from the sale could be returned to shareholders or used to finance a massive organic expansion on the ground in Asia which — if the market has the potential they say it has — would deliver the growth without the absurd level of risk embedded in this deal.
None of the serried ranks of advisers will say this of course because they stand to earn more than £1 billion in fees by promoting the takeover, however bad they may think it is in private. That's City ethics for you.
What's really fascinating though is that this deal raises many of those same issues as the Royal Bank of Scotland bid did for ABN Amro — a deal promoted by a driven chief executive, unanimously supported by his distinguished board, and supinely voted through by shareholders.
Now here we are again — and so soon. It really is so inconvenient for the system to face such a test when we still have not completed our Maginot line of defences to show we have learned the lessons of the last debacle.
The governance code calling for shareholders to behave more like owners is still being drafted.
The ink is not yet dry on new guidance telling boards to provide a proper and rigorous challenge to hard-driving chief executives.
In fact this case shows how empty most of the proposed governance reforms may prove to be.
An experienced FTSE 100 chairman told me the other day that it is almost impossible to rein in a chief executive when he is at the top of his game — and when he is therefore most likely to overreach himself — because the board is in awe of him and the shareholders think only of the share price.
The fact is that Thiam is quite brilliant, hugely charming, incredibly charismatic, wonderfully persuasive, and marvellous at building consensus.
It makes him almost impossible to resist. In their hearts the board may know that they are not there to bet the farm.
It is without doubt the opportunity of a lifetime and Thiam has persuaded them that the possible reward is worth the risk.
Perhaps it is. Part of running a company is stewardship — preserving what is there for the next generation and one has to question whether it is in fact right for a board to try to bounce its owners into what it calls a transformational deal, but which is in fact changing beyond recognition the company they bought into.
Shareholders did not buy into Prudential to play Russian roulette. How astonishing, after all we have been through in recent times, that so many seem willing to play anyway.
Must be something to do with the fact it is other people's money they are playing with.
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