Prudential faces an uncertain future

Howls of shareholders' derision greeted the failure by Prudential to clinch its deal to buy AIG's Asian business AIA. True, it may be a refreshing illustration of shareholder power. But more obviously, it's a textbook example of how management should not work.

Maybe Pru shareholders should be used to this sort of treatment. After all, former chief executive Jonathan Bloomer ruffled feathers with a controversial £1bn rights issue in 2005. Then there was the Egg saga, Prudential's online bank that turned into a disaster after the Egg credit card was launched in France. When management decided enough was enough, they took a £170m charge and put Egg onto the market. Even this went wrong, and after failing to find a buyer, the Pru reluctantly bought in the 21 per cent of Egg it did not own.

After the latest humiliation, there are calls for heads to roll, most notably chief executive Tidjane Thiam and chairman Harvey McGrath. Mr Thiam maintains that the board listened to shareholder concerns about the price being offered, but it might have been better to have tested shareholder reactions to the terms before proceeding with the offer. There were, however, legal constraints preventing dialogue between the bid being announced on 1 March and the release of the prospectus on 17 May. Sacking the bosses would leave the Pru in a sea of uncertainty with no-one at the helm. But their long-term future is in serious doubt.

More share tips and updates...

So, with management issues resolved and the AIA saga now a painful and expensive experience, where does this leave Prudential? First off, it needs to appease shareholders over the estimated £450m cost of the aborted deal. Some losses may be recouped as the Pru took out a currency hedge in anticipation of the deal going through. This could make around £200m in profit as a result of sterling's decline against the dollar.

Looking at the business model, the operation has been using the mature but cash-generative UK side to finance the upfront costs of writing new business in Asia. But there are snags. Prudential put much polish on its first-quarter sales for 2010, which included a 26 per cent rise in new busines sales on an annual premium equivalent basis. But this was in comparison to a weak period in 2009. Take a longer perspective and growth does not look so good. Total new business in the first quarter of £814m was down from £904m in the fourth quarter of last year. And while new business in the UK at £193m was up from £180m a year earlier, it was still down from the £201m of sales in the fourth quarter of 2008. Much the same can be seen in Asia, where new business sales in the first quarter rose by 30 per cent to £359m, but were still down on the £375m generated in the first quarter of 2008. And yet the share price is higher now than it was two years ago.

Meanwhile, the M&G asset management side of the business saw net inflows slide 26 per cent from the first quarter of last year to £1.89bn. Total funds under management rose 35 per cent from a year earlier to £182bn. That sounds impressive, but not so much considering the FTSE 100 index rose by around the same amount. Those figures reflect an improvement from the lows seen last year. The big question is whether they can be maintained when there is unlikely to be a repeat of the rise in share prices seen last year and consumer sentiment remains fragile.

Of course, there is huge potential for expansion in Asia and the Pru's shares are now listed in Hong Kong, which should help it raise new capital. And that may well be needed to maintain the momentum in Asia if cash generated by the UK operation starts to wheeze.