Prudential Purchase Of AIA: US Taxpayers Don't Offer Bargains

Prudential plc, anxious to buy the AIA unit of American International Group (NYSE: AIG), can’t raise the money. So, it wants a better price than the $35.5 billion it agreed to pay the American company.  The UK insurer continued to push talks to restructure its faltering purchase, according to several media accounts. But, AIG’s board has turned Prudential down, leaving the deal in limbo and perhaps on the edge of collapse. Prudential’s latest offer was $30.4 billion

AIA is the huge Asian arm of AIG. Prudential agreed to buy it and then tried to raise the capital in the public markets. Investors thought the price was too rich which impeded Prudential’s plans. Some of the UK company’s shareholders wanted a new deal for as little as $30 billion.

AIG is, of course, not really an independent company. The American taxpayers, own 80% of AIG, which they got for the $180 billion they put into the insurance firm when bad derivatives bets engulfed the firm in red ink.There was absolutely no reason for AIG to take the lower price. AIG recently posted a profit. It has been able to sell other businesses. The economy in Asia is improving quickly. AIA’s prospects are likely to improve. If Prudential cannot cut a new deal, managers there will probably lose their jobs. That’s the way it goes with M&A deals that do not go through. Bet the house, lose the house.

Prudential needs to come up with $21 billion in cash to complete the deal. It appears that the capital markets are not willing to make that investment. AIG could do an IPO of the unit, but that would likely bring little more than half of the Prudential sales.

AIG can now to make the best of the AIA situation. It can take the company public and continue to hold a large piece of the equity. It would be able to pay back taxpayers billions of dollars and hand off enough of AIA to enjoy an upside. Over time, it could sell that stake, just as the federal government sold its holdings in Citigroup (NYSE: C), –at a profit. Prudential may need AIA, but taxpayers don’t need Prudential.

And, AIG’s board has made that clear.

Douglas A. McIntyre