Friday, May 28, 2010

Deal Trouble

Maybe it is a good thing for the shareholders of Prudential PLC to be rebelling against management's desire to acquire AIG's Asian life insurance unit, as reported in today's Wall Street Journal. The price tag is a big gulp — $35.5 billion on offer.

In the midst of proxy voting season right now, shareholder bile levels are running high about levels of compensation. But getting back to the Prudential deal, it is worth being reminded, as a wise hand once said, "Vastly more money is wasted on bad acquisitions than on overpaid CEOs."

That sensible note comes from Robert Denham, in an article he wrote for Directors & Boards 10 years ago. Denham parachuted into Salomon Inc. with Warren Buffett to help stabilize the investment firm following its 1991 Treasury auction scandal that threatened to destroy the firm. He returned to his partnership at the Munger, Tolles & Olsen law firm in Los Angeles after negotiating the sale of Salomon to Travelers Corp. for almost $10 billion.

I resurfaced some of Denham's wisdom on cautious dealmaking for the latest Boardroom Briefing, a series of special reports Directors & Boards produces four times a year. Click here to access a copy of it.

Another bit of Denham's deal wisdom seems particularly worthy of mention. I don't know that this applies to the Prudential situation, but shareholders of the U.K. insurer (which is not related to the U.S. insurer of the same name) may rightly be fearful that it does:

"The board can play a valuable role in connection with proposed acquisitions. Ego, animal spirits, and badly structured compensation systems all conspire to encourage CEOs to love acquisitions even when shareholders should hate them."

Pru's shareholders seem to hate this AIG deal — at least at the proposed price. The board should take a page out of the Denham playbook and proceed cautiously.