AIG's Asian Gamble

The collapse of the AIG-Prudential deal could turn out be more promising than the original agreement for the British insurer to buy AIG’s largest Asian life-insurance business, AIA, for $35 billion dollars.

First, it shows that AIG’s board is far more independent than during the Greenberg era. Benmosche battled a highly contentious board over the original Prudential deal until he was able to push it through in March. But this time, he couldn’t get his way. AIG’s board hung tough and refused to accept Prudential’s lower offer. It was reportedly unanimous except for Benmosche.

The big question is why AIG’s board turned down $30 billion, which is more than is being predicted for any IPO. Who knows what went on in that board room, but most interesting reason I have heard is that some directors thought they could eventually sell AIA for a lot more to the Chinese. And already we’re hearing reports that Assicurazioni Generali SpA, Europe’s third-biggest insurer, may be interested in buying parts of AIG’s operations in Asia.

The directors might also prefer to sell off slices of AIA gradually in an IPO, while the business continues to grow. So, over the long haul, they could beat the Prudential price. Since the U.S. government owns nearly 80% of AIG and could have vetoed the board’s refusal to take the lower offer, it suggests they buy this argument.

In fact, Treasury Secretary Timothy Geithner praised the company’s decision to walk away from the Prudential offer. He told reporters yesterday,”A.I.G. is now free to pursue a bunch of other options to help maximize the return, reduce any risk of loss to the taxpayer. They have got a very strong management team, a much stronger board in place, making incredibly impressive progress frankly in restructuring that entity.”

Geithner’s faith in AIG is pretty remarkable, reflecting the turnaround Benmosche has been able to pull off since he took over last August. AIG’s board is betting the company will do even better and Geithner is letting that bet ride. Of course, the taxpayers who provided the stakes don’t have a say. I personally would have bet on Benmosche over his board, but I applaud Geithner for not interfering. We’ll see how well AIG can do with AIA and let’s hope neither taxpayers nor investors come up short.