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Karate Bid


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What’s going on?

Activist hedge fund Third Point has bought an almost-$2 billion stake in Prudential – and plans to use its newfound power to split up the insurer’s Asian and US businesses. Hi-yah!

What does this mean?

Activist investors are renowned for using their sizeable ownership stakes to influence the future direction of a company. And Third Point – which now owns nearly 5% of Prudential – is no different: the hedge fund wants the insurer to separate its fast-growing Asian business from its small US business. It’s also pushing Prudential to move its costly head office away from the UK – a change that could save the business $260 million a year. There’s nothing to suggest Prudential won’t be on board with this new strategy, either: just last year, the insurance firm was only too happy to break up its investment management business in an effort to boost the value of its shares.

Why should I care?

For markets: No more distractions.

The logic behind the move is that the two separate insurers would be worth more than Prudential is alone. That’s because the company as a whole fetches a much lower “valuation multiple” – i.e. the ratio of its market value to the profit it makes – than some of its Asian rivals. Without an expensive head office or distracting US business to drag it down, Prudential’s Asian segment might earn itself a higher valuation multiple, which should help lift the company’s overall market value.

The bigger picture: Unpopular demand.

Third Point’s proposals could be welcomed by Prudential’s management, sure, but they’ll likely be met with resistance elsewhere. The company has a large number of British investors who currently enjoy the London-listed stock’s hefty dividend. Third Point’s proposals would not only delist the company’s stock from the London Stock Exchange, they’d also cut the amount the firm pays in dividends so it can invest more in the business itself.

Originally Posted on February 25, 2020 – Karate Bid

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