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Britain's Prudential on Monday agreed to buy the Asian arm of US peer AIG for 35.5 billion dollars in the insurance sector's biggest ever takeover but the share price crashed on concerns over funding.
Prudential is set to become southeast Asia's biggest insurer after the British firm agreed to pay the equivalent of 26 billion euros for AIA, making it the industry's biggest ever acquisition, according to Dealogic.
The deal allows AIG to repay the US government a huge chunk of debt while it also highlights a pick-up in cross-border takeover activity since the start of the year as the global economy recovers from its deep downturn.
"Today's Prudential deal to buy AIA, along with Merck's acquisition of Millipore and the recent Cadbury's sale to Kraft has raised optimism that mergers and acquisition activity could continue to grow," said analyst Joshua Raymond at London traders City Index.
Prudential's deal, which will see the group double its market value, comes just one day after German pharmaceutical giant Merck KGaA agreed to buy US biotechnology firm Millipore Corporation for 7.2 billion dollars.
Just one month ago, US group Kraft Foods snapped up British confectioner Cadbury in another multi-billion-dollar deal.
Prudential said that AIA represented "a unique and strategically compelling opportunity ... to create the leading insurer in South East Asia".
It added in a statement: "Prudential Plc has reached agreement with American International Group Inc. (AIG) on terms for the combination of Prudential and AIA Group Limited, a wholly-owned subsidiary of AIG.
"AIG will receive total consideration of 35.5 billion dollars, comprising 25 billion dollars in cash and 10.5 billion dollars in new Prudential shares and other securities."
The cash component will be financed through an underwritten share issue, the announcement of which sent Prudential's share price tumbling more than 12 percent on Monday.
"Today's share price fall is to be expected considering the expense of the deal and the subsequent ... (share) rights issue to help pay for it," Raymond said.
The takeover will transform Prudential into the world's top non-Chinese insurer by market capitalisation, ahead of major competitors Allianz and AXA.
"This transaction offers the opportunity to bring together two leading companies, positioning the combined group to capture the future growth opportunity in Asia," Prudential said in its statement.
"We believe the transaction will both amplify and accelerate our stated strategy to deliver value to our shareholders," it added.
Prudential on Monday also announced that it enjoyed record group sales across Asia during the final quarter of 2009.
Group chief executive Tidjane Thiam said that the region was the "most attractive opportunity in our industry today," partly because of the strong savings habits there.
"Asia is the engine of the group's future growth, particularly the fast growing economies in Southeast Asia," he said.
"Asia is complex, dynamic and exciting, and its economies differ significantly, with varying levels of economic development, from the OECD members, Japan and Korea, to the fast growing markets of Southeast Asia, such as Indonesia and Malaysia."
Sales in Asia already make up half of new contracts for Prudential across a number of countries including China, India, Indonesia, Malaysia and Thailand. The company also has a strong presence in Britain and the United States.
AIG, meanwhile, has been forced into giving up some of its assets after the company's near collapse in the depths of the financial crisis led the US government to bail it out to the tune of some 180 billion dollars.
The Wall Street Journal reported that some of the proceeds from the sale of AIA to Prudential were already earmarked for US government coffers.
