The shares of UK insurer Prudential fell more than 20 per cent last week after it announced a deal to acquire AIG's Asian unit for $35.5 billion.

The reason behind the fall in share value is believed to be the lack of details provided by the company and its failure to disclose terms of the issue to the shareholders. The shareholders are anguished as the terms of the rights issue have not been disclosed to them.

Prudential has said that it will issue $10.5 billion worth of mixed securities such as common stock, convertibles and preferred to AIG. While, $20 billion is expected to be raised through a rights issue likely with a discount.

The company announced on Friday that it has three banks, Credit Suisse, HSBC and JP Morgan for underwriting its record rights issue and had recruited 30 banks and sovereign wealth funds to share the risk.

The deal involves the issue of shares estimated to be worth $30.5 billion and they are most likely to be issued at a lower price than expectations. The issue lower issue price for the shares could significantly boost the investor interest.

Warren Buffett has written a letter to the shareholders to explain the issue of stock at below value. Supposedly, there are two companies A and B with of $100 a share and at the lower market the value has dropped to $80 a share.

Now, Company A decided to buy company B and pay the value of $100 a share. He says if company A is paying for the acquisition by cash then it is good but if it paying by issue of shares then has to issue 25 per cent extra shares. This means that it will pay $125 a share when considered by the intrinsic value of its own stock.

Going by this logic Mr Buffett shouldn't have issued the stock of his own equity to pay partly for Burlington Northern railroad. He explained the decision and said that he had $22bn in cash which had to be invested and the deal also required some issue which made it more expensive but still worth the value.

In the case of the prudential deal it is very difficult to determine the intrinsic value for a stock in the insurance sector. However it is expected to be overvalued as the prices have remained unchanged since four months in which earnings per share have risen 40 per cent and dividends rose 20 per cent.

Analysts say if the shareholders don't agree to pick up the shares expected to be at a lower price the company will have to issue even more shares to make up the purchase price which will make its shares less in value.

Such risks are offset by the potential value these two companies could create together as they are expected to bring together huge manpower resources in the Asian region to boost sales.