'A shambles and a Disgrace' – The Pru reaps the whirlwind

But insurer's chairman says 'no reason' for directors to quit after blowing £450m on failed AIA deal. James Moore reports

Prudential's shareholders yesterday gave full vent to their fury over the company's failed bid for Asian insurer AIA, branding its directors as "arrogant" and joining with a growing band of City institutions that have called for heads to roll.

While there were a handful of positive comments aimed at the company's board, the majority were sharply critical of Prudential directors, and of chairman Harvey McGrath and chief executive Tidjane Thiam in particular. Shareholder Anthony Watts summed up the feelings of many when he described the affair as "a shambles from start to finish" and "a disgrace".

"You failed to do your job properly, all of you. All of you are responsible for this failed deal," he told directors, saying they should "do the honourable thing" and resign.

His comments, and many more like them, drew loud applause during a stormy affair that showed just how far the insurer's reputation with its investors has fallen. Directors, who glowered at the assembled band of as many as 300 predominantly small shareholders, were accused of being "smug" and "arrogant" at the meeting, held at the Queen Elizabeth Centre in Westminster.

The insurer had hoped the hall would serve as the scene for its triumph – the annual meeting had been delayed ahead of a vote to approve the AIA deal and a deeply discounted £14.5bn rights issue to fund it. In the end, the recriminations flew thick and fast as the men and women who are responsible for losing their shareholders £450m sat stony faced as the listened to one stinging criticism after another.

That £450m is made of the £300m Prudential will have to pay to a bevy of bankers, lawyers and public relations consultants as a result of the $35.5bn (£24.5bn) deal's collapse, together with a £150m break fee to AIA's US state-owned parent AIG.

As the meeting kicked off, Mr McGrath again stressed that Prudential's board was unanimously behind the decision to go ahead with a takeover that has left the company facing a crisis of confidence at a time when its results should have put it on the front foot.

In was those results that Mr McGrath attempted to use to draw some of the sting out of his employers' ire. He said Prudential's sales were up 27 per cent to £1.35bn for the first five months of 2010. Sales in Asia grew 33 per cent to £579m, although fund manager M&G did less well. Net inflows of £3.4bn were less than half the £7.9bn last time.

In his opening statement, Mr McGrath also said: "A lot has been said and a lot has been written about this proposed deal since we announced it in March. We entered into this from a position of strength, not weakness... AIA was an opportunity to accelerate our growth not to address a problem. It was a unanimous decision to pursue the deal and a unanimous decision to pull out."

He also said there had been 15 formal board meetings to discuss it, together with a plethora of other meetings: "This transaction did not want for forensic attention."

Despite this, Prudential committed a series of blunders and miscalculations following the bid's March unveiling, not least the failure to secure approval from the Financial Services Authority for the structure of a merged Prudential/AIA before pricing the rights issue and the attempt by Mr Thiam to take on a second job at French bank Société Générale.

Mr McGrath admitted the former did not inspire confidence and went on: "It is clear that shareholders felt less than fully engaged and informed. I am to sorry to those that this has caused discomfort and worry."

Mr Thiam said buying AIA was "in line with our strategy" and "worth the risk". He added: "I deeply regret (the deal collapsing). I will have the task of restoring your confidence."

Mr McGrath later said he saw "no reason" for any board member to resign, despite shareholder after shareholder standing up to demand that heads roll. They also questioned the advice Prudential received, in the wake of Mr McGrath's stressing the external counsel the company had taken over the price paid and the failed attempts to communicate the takeover. Prudential's main banking advisers were Credit Suisse, JP Morgan and HSBC, while it also retained public relations firm Brunswick.

Credit Suisse was named at the meeting by angry shareholders. One called for Prudential's counsellors to be "dispensed with". After the meeting had finished Mr McGrath said the company regularly reviewed its relationships as "a matter of course" and pointed out that none of the banks were on its regular roster of advisers, which stepped back from the deal on grounds that they were "conflicted". The company did obtain some supportive comments from analysts yesterday, but faces a difficult struggle to restore its standing, with Schroders having become the first top 15 shareholder to call for changes of leadership.

Other institutions, albeit with smaller shareholdings, have made similar comments in the run up to yesterday's bloodletting. And while the company's remuneration report passed with only a 6 per cent vote against, controversy could flare in the event of next year's bonus round.

Yesterday's results performance was strong enough to suggest that the company might attempt to pay up. Mr McGrath was equivocal saying the decision would be made at the appropriate time. If Mr Thiam is showered with money after he and his colleagues managed to lose their shareholders £450m, it could add gross insult to financial injury.