Pru's AIA Bid Signals Start of Recovery Stage

Last Updated Mar 2, 2010 12:41 PM EST

The mega-deal is back, but whereas the bids for ABN-Amro helped cause the global financial crisis, Prudential's offer for AIG's Asian business helps solve it. Is it the best sign yet that the crisis is over or the first indication that financial services companies are ready to make the same mistakes again?

Governments bailed out the financial services industry after the 2007 credit crunch. Now the financial services sector is starting to bail out government.

And not only are mega deals back, Prudential has shown mega finance is available for growth as well as for repairing balance sheets. Having forked out huge sums merely to return Lloyds, HSBC and Royal Bank of Scotland to their former positions, shareholders now seem eager to subscribe an even larger amount to expand the Pru.

The price for AIA, the Asian subsidiary of America's AIG insurance group, exceeds the UK life and pension company's stockmarket value. It is betting the ranch â€" and with cash, not shares -- but the deal differs from RBS's acquisition of ABN in being nearer the bottom of the market than the top. It is an opportunistic purchase.

There have been other opportunistic deals since the financial crisis, of course, but Barclays Lehman Brothers acquisition was modest by comparison and some acquisitions were misjudged - Bank of America's Merrill Lynch takeover and Lloyds' merger with HBoS proved to be pigs in pokes.

AIG insured the bad banks' bad loans and as one falling domino knocked over the next, the US taxpayer bailed out AIG in return for an 80 per cent stake.

A planned flotation of AIA on Hong Kong's stockmarket would recover some of the state's $182bn investment but markets are fickle and taxpayers would have been left with a large part of this unwanted subsidiary.

Selling outright removes the risk and recovers more upfront cash - and for US taxpayers, holding a stake in the Pru is preferable an investment in AIG.

The UK company not only buys a business for below the planned flotation price but buys into growing Asian economies.

However the deal is most important for marking stage-three of the financial crisis. The ABN takeover represented the problem phase; the government rescues and rescue rights issues were the stabilizing period; now Pru's deal signals the way out of the crisis.

And it is potentially good news for British taxpayers, corporate and personal. The UK owns 85 per cent of RBS and 41 per cent of Lloyds after their mistaken bids and plans to sell those shares over several years. AIG has shown exits can be sooner and bigger than planned because there are bidders ready to write big cheques again.

Pru's cheque could have bought the whole of RBS. It preferred to look abroad but other opportunistic bidders may be prepared to snap up large parts of Britain's state-owned banks. And now megabids are back, maybe a mighty merger outside the financial services sector is possible again too?