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Prudential investors are poring over documents to assess who benefits most – and over what time frame – from the UK insurer’s $35.5bn (£23.6bn) bid for the Asian business of AIG, the stricken US insurer. It would be the biggest acquisition in the financial services industry since Royal Bank of Scotland led the disastrous consortium bid for ABN Amro, the Dutch bank, in 2007 – now seen by some as one of the sparks of the banking crisis.
Already, many of the Pru’s leading shareholders have expressed reservations about the size of the deal, the price and the terms of the shares offered to AIG, and the ability of the UK company’s management team to execute it without impairing shareholder value. Pru investors were not consulted – even top shareholders were only informed the night before the plan was made public. Now they are waiting for the management team to convince them of the strategy before they vote on the share issue needed to fund it.
Few believe that shareholders would vote the deal down. “It would be seismic,” says one top shareholder. “However, many things have happened in the past two years that would once have been unimaginable.”
AIG is just one of the many financial institutions that were bailed out by governments in the financial crisis. And investment institutions – the pension fund managers and insurance companies – are now under pressure to ensure that ill-judged acquisitions do not allow the financial crisis to burst back into life.
The changing attitude to mergers and acquisitions and the role of investors was brought into sharp focus recently by Lord Mandelson, UK business secretary. He said too many mergers failed to create long-term value, asserting that a “healthy approach to mergers and acquisitions needs to reflect [a] commitment to good management in both the long and short term”.
Lord Mandelson called on shareholders to be “genuinely critical” of takeover bids, rather than focusing on short-term share price movements. “The open secret of the past two decades is that mergers too often fail to create any long-term value at all, except perhaps for the advisers and those who arbitrage the share price of a company in play,” he said.
His words followed shortly after Kraft, the US confectioner, succeeded in a hostile bid for Cadbury, its UK rival. This success has been widely attributed to the dominance on Cadbury’s shareholder register of traders and hedge funds.
Lord Mandelson argued for the “values of the long-term or organic growth and value creation over the temptations of excessive leverage and the fast buck”. He proposed a series of changes to the UK’s takeover regime, including giving companies the power to block deals supported by fewer than two-thirds of shareholders. Under current rules, winning 50.1 per cent of shareholders votes in favour secures a change of ownership.
He also suggested lowering disclosure rules on share ownership from 1 per cent during a takeover to 0.5 per cent. And, in an echo of an earlier suggestion by Lord Myners, City minister, Lord Mandelson suggested introducing an obligation on a bidder to put its plans to its own shareholders for scrutiny.
Lord Myners pointed out last year that the UK’s Takeover Code protects the involuntary recipients of a bid, but “virtually ignores” investors in the company making the offer. He argued shareholders would benefit from an independent report about the assumptions, risks and opportunities inherent in a bid, as happens in countries such as Australia.
In the past, UK investors might have dismissed these comments as politically driven, protectionist rhetoric ahead of a general election. The Association of British Insurers, which represents many of the UK’s biggest investor groups, said it was “wary” of Lord Mandelson’s proposals. A bidder who “can muster 50 per cent of the votes will be in control anyway, and a higher acceptance threshold will help entrench bad boards”, it said.
However, the association added: “Lord Mandelson may be right that getting a higher price in a takeover may not be a perfect proxy for directors’ obligation to consider the best outcome for the company in the long term.”
Many investors see Lord Mandelson’s comments as the latest government effort to persuade them to take a more active approach as “owners” of companies. In the wake of the financial crisis, such efforts have become more urgent, as long-term shareholders are blamed for nodding through acquisitions such as ABN at the peak of the market, and for allowing traders and hedge funds manipulating shares and selling stock for quick returns to dominate markets.
One of the more radical solutions has been suggested by Lord Myners, who has floated the idea that shareholders get preferential voting rights linked to the time they have held stock in a company.
Critics, including many long-term investors, say the proposal is unworkable and would turn on its head the UK’s long-established tradition of shareholder democracy based on one shareholder, one vote, as well as equal treatment of all shareholders.
Core to this tradition is the principle that bidders have to pay the same premium for taking control of a company to all its owners, regardless of how high they rank on the shareholder register. This system stops one class of investors being offered preferential terms by bidders keen to win their support, and has been taking hold in other regions where companies have rewarded shareholders with more voting rights than others. Last year, for example, 24 international investment groups won a two-year battle to secure equal treatment for all shareholders in takeovers in Sweden.
However, as the impact of the RBS-led acquisition of ABN Amro continues to ripple through the world’s financial system, fund managers acknowledge they must prove they are acting in the long-term interests of their clients.
That may mean shareholders reconsidering principles they hold dear and doing the unthinkable – even voting down an acquisition, if necessary.