ΒιΆΉΤΌΕΔ

> No one can accuse the Prudential's senior directors of being averse
> to risk - although, to state the obvious, most of the risk doesn't
> actually fall on them but sits with the Pru's owners.

All Sir Greedies hate putting their own money where their mouth
is. In any case, we're breaking these giants up, not letting them get
even bigger. They just don't get it yet, do they. Why are
the Sir Greedies so slow on the uptake?

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It will come to be seen as the equivalent of Time Warner-AOL in the dot.com era

Another RBS in the making? Robert, you do not seem impressed and I suspect you are being very careful in the choice of words. Surely an 81% discount is highly exceptional and indicates that the management at least perceive shareholders to have little confidence in the long term benefits. Global warming could soon put severe stresses on the insurance industry and its associated financial services.

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Isn't this a big problem with shareholder capitalism as currently constituted. Directors personally risk very little in return for a potentially enormous gain whilst the owners risk everything for a relatively small gain. The fact that they can spend so much of the owners money when it is not clear that the owners support the strategy seems surprising and should mean that they are all sacked if the deal is not approved. Of course that won't happen and the directors stand to make a lot of money if the deal does go through, no doubt awarding themselves shares and bonuses in the process. If everything goes wrong after the deal they stand to lose any shares they hold but no doubt their golden parachutes and pension funds are protected (unlike those of the workers!).

Robert,

Is this not another toxic CDO (by proxy)?

All made somewhat funnier in one respect: is CDS (again by proxy) to be supplied by Pru's acquisition?!?

Interesting to see the notion of growth at all costs still alive and well.

Wasn't M&A Jenga a thing of the past?

---

Hmm Robert.

What you seem to be implying between the lines is that there isn't any money left to invest anymore. Bad news.

The Pru moving into Asia, GLG massively bailing out of the investment market, whatever next?

What happenned to all that dosh Governments claimed was missing tax billions, stashed away in Luxembourg, Cayman Islands etc?

The trillions moving around money markets via hedge funds, investment banks is not as transparent as in retail banking or share ownership.

So whose money can it be?

Not Governments, they don't have any, not the average Joe in the street, he doesn't have any anymore, not the Banks, they don't have any either.

Not the wealthy elite - there aren't enough of those legitimately!

So can we say that 'money laundering' is happening on an industrial scale globally as 'funds' (from whatever sources) are moved around - just look at the bailout of the euro-zones?

It would be enlightening to us to see which and whose 'funds' bailed out recently and above all who owned them in reality?

Heaven forbid UK investment banks were behind a dumping of the eurozone!

ps. I noticed this quote from the Beeb's business pages lunchtime

Mr Laws said his predecessor, Liam Byrne, had left him a letter saying simply: "Dear chief secretary, There's no money left."

Says it all really - the Pru will be lucky if it succeeds.

Typical posts re. "Sir Greedies", risks, etc. Please advise a "dum dum" like me. Please quantify these risks. Why is this bad? What's wrong with AIA? Please contrast AIA with other Asian insurers.

Oh well, if it all goes bad the governments can bail them out..what risk?

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# 9. At 1:35pm on 17 May 2010, The Patriot wrote:
> Typical posts re. "Sir Greedies", risks, etc. Please advise a "dum dum"
> like me. Please quantify these risks. Why is this bad? What's wrong
> with AIA? Please contrast AIA with other Asian insurers.

Sure thing. The risks are standard, systematic risks of high coupling. These big systems like The Pru have loads of tightly coupled deals.

The idea to stem the risk is always to distribute the risk, reduce the importance of individual elements and reduce the tight coupling. These are standard, no-brainers in systems engineering – make it local. That means many, loosely coupled, redundant, tightly defined (i.e. cohesive), smaller entities, none of which have any critical importance to the overall system. As an example, consider the London Taxi system. If one taxi crashes, I don't give a hoot. Now we are doing the same thing to the banks etc. If one bank crashes, why should I have to care?

So how come these β€œdum dums” can't grasp simple risk management? Because they are the wrong people. They are short-termers, who want to suck the firm dry while the going is good, and get the taxpayers to stump up when it all goes pear shaped. Zero moral hazard, you see. So break them up.

A curious article, typical of British journalism, that implies a lot and says remarkably little.
For example, there is no explanation or comment on why the FSA intervened. What are potential risks that the FSA mention? Is this an insurance risk, that is, the Pru can't meet insurance requirements, or is it investment risk?
If it is the former then it is a sensible intervention, since any collapse of the Pru would cost the British Public.
But there is no explanation of the new structure required - for example, is it like Enron were everything is hidden from view! Complex structures tend to create their own opportunities, so only time will tell if the intervention has any merit.
However, the FSA quote appears to relate to investment risk, so one has to question the competence of administrators sitting in Canary Wharf, with a fairly poor history of understanding corporate dynamics (Equitable Life, Northern Rock etc), having this much power in this area.
Such an intervention would also raise questions about the role of shareholders, most of whom will be institutional. Shareholders will, or should, be provided with sufficient information to determine whether this could be profitable venture. An intervention by the FSA, on investment criteria, would imply that shareholders are not capable of assessing the risk/reward equation adequately.
If that analysis approximates to the truth we have a very serious problem of both confidence and competence in the institutional sector, that bodes ill for the ability of a sector that provides a large segment of income to the UK economy.
Or it says that the FSA are in a power struggle to control, rather than merely regulate, the investment sector. Does anyone really believe that the FSA has the competence for such a role, or should even being looking at such role. It's a bit like creeping nationalisation.
Yet none of these important factors are even considered in Mr Peston's article. A great pity because there is incredibly little media analysis of the position and performance of the FSA - a powerful body in the UK that is answerable to absolutely no-one. If you don't believe that read the empowering legislation and the FSA's own web site.

81% discount on the new shares.... Looks like the Pru really wants it to go through. Let's hope they have done the due diligence, know what they are really buying and understand the market risk they are buying into.

Can't help feeling that it looks like a deal too far fuelled by over-enthusiastic global ambitions.

The Insurance Industry has milked the ordinary Joe's in UK and Europe and now they want to work the same scam on Asian punters!
Scam 1 - Endowment mortgages that fail to deliver.
Scam 2 - Pension Plans that fail to deliver.
Scam 3 - Employment Protection Insurance that tons of get out clauses.
Scam 4 - Fees and invisible costs etc.
For the PRU its a quick way to get in to Asia.
But as many American businesses have found out with China,the Asians are smart and too canny for them.Many western businesses have failed to penetrate the Asian market. Hence the sale of the business in the first place!

Reply #9 The patriot.
As I understand it there is nothing wrong with AIA. It is a well run company doing traditional insurance in the fast growing Asian market where it is market leader.
Furthermore it has only come on the market because its parent AIG has come unstuck big time in the similar, but unconnected, business of financial derivatives.
In short its highly desireable. A bit like a nice house on a nice street where houses rarely come on the market.
The concerns are
1.The prudential management may be overpaying which will impact profits.
2.The acquisition will more than double the size of the company. Will this lead to management and financial overstretch.
3. Prudential is currently cash generative but the new businesses may change that and possibly cut dividend yield.
In short its a classic conflict between the managements desire for growth at almost any price and the shareholders/owners desire to ensure that profits, dividends and return on each Β£ of capital is maintained.
It is the same arguement Warren Buffet, the largest shareholder of Kraft, had when the company took over Cadbury.
As JK Galbraith said the management of large companies can be likened to the head gardener of stately home who may sometimes forget that they do not own the garden.

# 19. At 4:18pm on 17 May 2010, Anthony_analyst wrote:

> As JK Galbraith said the management of large companies can be likened to
> the head gardener of stately home who may sometimes forget that they do not
> own the garden.

Or, as I put it, the management of large companies can be likened to
a big, lazy, fat cat lying on the kitchen floor who is too stupid to
know that its sole purpose in life is to catch rats, not to slurp
up any of the cream.

"GLG's owners may be taking Man stock (they are not liquidating) but they presumably believe the valuation of their investment management business isn't going to get any better."

What does this mean exactly? Why would they be buying the stock if they thought the valuation is going down?

For anyone selling a stock, someone is buying it. Someone believes Man stock is worth buying. And some believe AIA stock is only worth selling at the price stated. Why do you think it is interesting to focus on the seller in one transaction and the buyer in another, completely different one?

Things have come a long way since the pre-war days when t'man from Prudential would call for his "tuppence per person per week" ? :-)

#15,

You are contradicting yourself!

Upon completion of the acquisition, I hope that the Pru will immediately begin steps to demerge the former AIA, allowing those who want Far East exposure to take their chances.

As has been amply demonstrated since mid-2007, in matters of financial services (and not just banking), big is not necessarily beautiful.

I would be more concerned about the ability of the Pru's management to make something of it. I've seen too many companies in the past go abroad and not understand the culture and come unstuck. I bet they are selling it in 3-4 years time for less than they bought it for.

# 23. At 7:33pm on 17 May 2010, The Patriot wrote:

> You are contradicting yourself!

It's all in the literature. The trouble is that the dum-dums read
the wrong stuff. But the key issue is simple - make it a goal
for any component in the system to be unimportant, and
reduce importance of any coupling that exists between the
components. Such systems can last.

There is no contradiction whatsoever here, yet the goal of
the management of this firm is too make itself _more_
important, not less. Which is exactly the wrong direction
for risk reduction. It's egoism before common sense.

#27,
You wrote:
"The idea to stem the risk is always to distribute the risk, reduce the importance of individual elements and reduce the tight coupling."

How do you "stem" risk? How do you "distribute" risk? By relying primarily on the (sluggish) UK market?

How can you "reduce tight coupling"? How can you "reduce the importance of individual elements" (when there's only one in the first place in the current context)?

You're right! It's definitely in the literature!

Good luck to the Prudential. We need more forward looking UK companies especially to grow in Asia. Yes it is a risk, but that is what leadership is about. Don't forget the more profit a UK based company makes the more revenue it contributes to paying off our massive debt. Look at another good example, Vodaphone growing in Asia.

I smell a rat!

In this time of economic crisis stick to what you know is a certainty or as near as.

Asian business culture is a different animal and therefore risky for us at this point.
Someone criticised post for being risk averse at the moment and I am wondering what planet he inhabits.
If more bad news hits the business headlines it will have a negative effect on the whole 'feel good factor' of the nation. Yes, it is rather low already but let's not add insult to injury.
The Prudential better look out, or it is cruising for a bruising.

# 28. At 09:29am on 18 May 2010, The Patriot wrote:
> How do you "stem" risk?

With redundancy. The system must be able to cope with the loss of components, without needing any help (from me!)

> How do you "distribute" risk? By relying primarily on the (sluggish) UK market?

The principles are generic, not related to a specific area. The simplest thing to do is to make the system so that, if one component fails, another can replace it immediately with no real impact. This would mean an architecture of small, interchangeable components that each have little individual value. Yes these old-fashioned deals militate against basic principles of small, cohesive units in favour of inflexible, critical behemoths!

> How can you "reduce tight coupling"?

By making the components operate independently of each other, such that if one fails, another can be used straight away regardless.

> How can you "reduce the importance of individual elements"
> (when there's only one in the first place in the current context)?

There will be many once we've broken them up. That's the whole point. I think you are suffering from β€œI wouldn't start from here” syndrome!

> It's definitely in the literature!

Yes. There is nothing new here. Large monolithic components are a very bad idea, and the notion is to break them up, distribute their functions, lower the importance of any coupling that occurs between them and increase the redundancy of both groups of components and within individual ones. Yet please answer my question – why are the β€œdum dums” unable to grapple even with the very basics? I think it's because they are failing to operate in the interests of us human beings; instead they appear to be acting like Sir Greedie! They need some basic training in β€œhow to be a person”! Does that ring any bells?

A case where investors get in and sell out as soon as they make a return.

Not a long term hold - how to move from boring long term hold to short term casino in one expensive lesson.

New CEO and senior board needed within 12 months.

Let me see....

a new CEO from outside the industry wants to more than double size the company he heads by buying another similar company on the other side of the world and asks existing shareholders to put in a large amount of new money in at a time of international financial crisis and volatile markets because he thinks he is getting an opportunity of a lifetime...

Ask the questions -
1. Who is taking the risk 1. What percentage of the CEO's wealth is tied up in the deal
2. Can the widows and orphans whose money he is asking for (via the fund managers) really take on such a risk at this time.