Shareholder Value Destruction: Guaranteed

A friend says it would be great if you could choose where to be born and as what. If you were born in 1900 you should have been born in England. If you were to be born in 1950 you should have been born in US. If you were born in 2000 you would be well off if you were born in India or China.
Needless to say you should have been born upper caste white male.
Similarly if you have a choice of being an employee or as an entrepreneur in the financial services space, you should be an employee. Look at the transactions that you are allowed to do and destroy shareholder value. It is almost impossible to see where the shareholder is being even thought about in such large mega deals.
No I am not talking about the Cadbury deal, I am talking about the deal Prudential is doing with AIG. It looks like the UK government (the potential owner of Prudential) has decided to share some of the bailout burden with the US government.
Hope you saw the recent news item that Prudential (UK) would pay $ 35 billion for the Asian Operations of AIG. This is funny.
Does the shareholder of Prudential(UK) have a choice? Well not if you are the small variety. Big companies are run by big people who need to create fiefdoms. Recently I heard that a very very big person in the Indian financial services industry was doing things to please his new shareholders. Now these shareholders’ needs may not match yours. That is the problem. I am a few years away from retirement and would love to believe that my annuity will pay me a nice pension for the rest of my life. However if my investment manager invests money in a nice quaint life insurance company in India, I can understand the business. However if one private equity deal forces my investee company to deal in China, Poland, and Australia – I have no clue what to make of a deal like this.
One European company trying to do a deal in Mumbai somehow wanted to meet me. He wanted my view on the deal. I asked him about the price. He was clear that the price was not so important. He said if we pay X as the price, our market capitalisation goes up 2X within 3 hours of announcing the deal. If M&A were to happen like this, the shareholder is doomed, to say the least. The deal did not go through, though.
Selling your UK business to buy a growing China business is so sound! Now Kraft will close down factories in UK, Prudential will sell the UK business to somebody – or stop writing further business. Tata will close a couple of Corus plants and one JLR plant.
Hey Brown, wassup?
All this sounds so much like an MBA case study! Only thing is what happens to the poor British pension holder whose fund manager has invested in Prudential? Well, not to worry here is a big deal that will make him rich – at least on paper, and on day one. So what if there is statistics to show that such mega mergers do not add any value to the shareholder? Shareholder value destruction seems to be a new hobby among employees – even if they hold ESOPs! I see this game being played out internationally and in India.

Prudential is already present in India and China. Now with the AIG take over their position will only get better in terms of top line. And surely they are so busy counting that they may not have reached the bottom line.

Doing a huge amount of risk business – in not very sophisticated markets cannot be easy, but yes it can look great to some set of shareholders. However stupid shareholders like me who look at dividend yield and such archaic terms do not understand the logic. Surely I am happy I am not an UK citizen who has a pension fund which has invested in Prudential. The deal sucks.

Many such deals look like the classic buy high in BRIC and hope that the valuations will justify the deal – the cash flow will surely not justify this deal at a price of $ 35 billion for AIA. It is way too much for a business which was hemorrhaging and needed a huge bail out. It is not easy to forget that not long ago nobody would have been willing to pay this kind of price for the whole AIG business.

Prudential is an aggressive player – both in marketing and in underwriting. In a market which is not very well regulated market there is a huge risk. If they are getting ’20 year free cash flow business’ (analyst’s language) sold as a 3 year product – and this could be a huge risk.

Obviously Prudential would have started out as a staid British organization a few decades ago – and now a bunch of Yankee shareholders are calling the shots. Now come to India – you own a unit linked endowment plan (which looks attractive after 14 years thanks to the charging structure). What all could go wrong?

•    A good fund manager could be replaced by a lousy one
•    The fund manager could do a derivative transaction
•    The owner could be a guy in Taiwan who may manage the fund from Hongkong

Scary is it not?

Also most of us think was AIG was badly managed (except of course Prudential) – and we have no clue about what ‘assets’ they are buying. Harshad and Ketan as fund managers, anyone?

Sad that Harshad Mehta could not sell Mazda Industries at a PREMIUM. Imagine somebody paying a PREMIUM for a business so successfully run aground. Logic, are you sleeping?

Not long ago big individual shareholders would treat company management quite scornfully. When we were doing research of a listed company one shareholder read the Riot Act to the Director (Finance) for not co-operating with one of my colleagues. That was in 1988 – but looks like a century ago!

Management is all about hired hands – and these days they change jobs every 36 months if not earlier. CEOs change jobs in 2-4 years. Imagine buying a 30 year Unit Linked Plan which will see 10 fund managers, 10 CEOs, …..and suckers like us believing that ‘the system will take care of us’. Fools Paradise?

If there is something about ICici bank that I have not said, here is a note questioning the p/e of Icici bank

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One Response to “Shareholder Value Destruction: Guaranteed”

  1. – Thanks. This is one of the reasons why one should go for “Open ended funds”. Can take out money anytime if its 3 – 5 year trailing performance deviates away from mean performance consistently (seen from sites like valueresearchonline).

    – Also diversify with few funds
    All of the funds cannot go bad at the same time. Because even if these guys make such decisions or change jobs, at some point they have to show performance. Else company AUM will suffer and their value in job market too – there is competition there also, there will always be another guy/fund motivated to do a better job. And an informed investor can find them.

    But when it comes to closed ended funds, pension funds, 10 year locked funds, they can get away with many things. Never get locked to anything , ever.

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