Why AIA’s successful IPO could become a nightmare for Prudential

The demand for AIA (AIA) shares is expected to be high tomorrow as the company makes its trading debut on the Hong Kong stock exchange after a remarkably successful IPO, which valued the company at $30.5 billion. The IPO set records as the largest in Hong Kong and the largest ever in the insurance sector as cornerstone investors made strong commitments. A Reuters poll is forecasting AIA will start trading Friday at HK$21.79 each, nearly an 11 percent premium on its IPO price. At that price, the market capitalization of AIA will be roughly $33.9 billion.

This is encouraging news for AIG, which sold a 58 percent stake in its Asian life insurance unit last week and has the option to issue more shares. AIG can sell roughly a billion additional shares during AIA’s first month as a listed company, potentially taking the total amount raised in the IPO to $20.5 billion and cutting its stake to 33 percent. The demand for a piece of AIA is also welcome news for U.S. taxpayers, since AIG plans to utilize the AIA sale proceeds to repay much of its Federal Reserve loan.

But there is one big loser in all of this – Britain’s Prudential plc (PUK), which tried to buy all of AIA in May (not just 53 percent of it), for $35.5 billion. The deal fell through after Prudential shareholders got nervous and forced the board and new CEO Tidiane Thiam to lower its offer to $30.4 billion. While AIG’s initial valuation of AIA was only slightly higher than Prudential’s second offer, exercising the option to sell more shares will easily bring in more money than the deal it walked away from. And while AIA is subject to a lockup after the IPO, it will be allowed to sell 50% of its remaining shares 12 months after the listing and the other 50% after 18 months.

So first of all, Prudential has to be kicking itself for not offering AIG more money. The market is showing $30.4 billion was just too low and AIG was right to abandon the deal even though AIG CEO Robert Benmosche wanted to do it. But his directors were against him on this one. And even more worrisome for Prudential, it has now turned its Asian life insurance operations into a potential takeover target for AIA. A few years down the road, the predator could become the hunted.

Prudential and AIA are the two biggest international insurers in Asia and the only companies with branches across the continent. Bloomberg Businessweek reports Prudential agents have been outselling their AIA competitors due in part to AIG’s woes, but with AIA reborn as an independent company, that gap should narrow. After all, AIA is the only life insurer in China that is wholly owned by a foreign company, continuing AIG’s long history there. AIA’s new CEO, Mark Tucker, has said he wants to triple AIA’s value. He not only used to work for Prudential but was Thiam’s boss. With more than 15 years experience in Asian markets, Tucker has to be just the kind of guy who might relish a run at his old company.