Prudential Plc's bid for rival AIG's Asian unit was close to collapse after the British insurer failed to secure a price cut, triggering talk it might itself become a takeover target.
Tidjane Thiam, Pru's ambitious new boss, had faced rising shareholder discontent over the agreed $35.5 billion cost of buying American International Assurance (AIA), forcing the 47-year-old to ask for a $5 billion reduction.
But AIG's terse statement on Tuesday that it would stick to the original terms left Thiam -- once an Ivory Coast government minister -- with little prospect to save the deal he launched after just six months in the top job.
Prudential shares were up 5.7 percent at 573 pence by 1512 GMT, outperforming a 0.6 percent rise in the European insurance sector, fueled by hopes a $21 billion cash call to fund the takeover will not now go ahead.
The good thing would be for the Pru to withdraw gracefully, said Paul Mumford, senior fund manager at Cavendish Asset Management. If they do put it to a vote, I'd be very surprised if shareholders vote it through.
Prudential said it would make a further statement when appropriate. Its top management is talking to its leading shareholders ahead of a final decision on the board which could come later on the day, or on Wednesday.
Before making a decision, Prudential wants to clarify whether it is legally obliged to go ahead with a shareholder vote on the deal planned for June 7, even if it cancels the deal, sources familiar with the situation said.
The likely demise of the world's biggest takeover so far this year spells a big hit in fees and a reputational blow for the many investment banks involved.
JUMP TO ASIA
Prudential was dramatically forced to reopen price negotiations with AIG last week as it feared it might fail to attract the required 75 percent shareholder approval.
The unraveling of the insurance sector's biggest ever takeover would put paid to Prudential's plan to transform itself into a largely Asia-focused business, and is likely to revive speculation of a break-up bid for the group, analysts said.
Shareholders must decide whether to remain active and push for a break-up of the group, or to leave the business to run as it does today, Redburn Partners Lance Burbidge wrote in a note.
Failure would also cast doubt over the future of Chief Executive Thiam, who has been described as arrogant by investors, to whom he has been pitching the deal over the last few weeks.
Pru will have to explain to us what is strategic plan B, said one shareholder, speaking on the condition of anonymity.
You are probably talking about putting the company under strategic review and maybe not under the current chief executive.
Thiam's handling of the bid was called into question last month, when Britain's Financial Services Authority ordered it to boost its capital position, forcing a last-minute delay of publishing details of its cash call.
And less than three weeks after launching the deal, the former McKinsey executive was forced to back away from taking a seat on the board of French bank Societe Generale, after shareholders complained his new role would distract him from the mega-deal.
A failure of the AIA takeover also poses a problem for AIG boss Robert Benmosche, who wants to use the proceeds of the AIA disposal to repay part of the $132 billion bailout the U.S. insurer received at the height of the financial crisis.
AIG's rejection has turned attention back on its original plans to float the AIA unit.
Analysts said while Prudential may attract bid interest in the wake of a collapse in the AIA deal, a lack of well-funded buyers make imminent approaches unlikely.
There's a possibility of that in the medium to long term, but I don't see it in the short to medium term, Panmure Gordon analyst Barrie Cornes said. I don't think there are any obvious takers.
(Additional reporting by Clara Ferreira-Marques and Raji Menon; editing by Michael Shields, Louise Heavens and Karen Foster)