Merrill
Takeover just paper gain
Since $29 is share swap, not cash, Temasek could just end up with shares in enlarged bank with a short-term paper gain.
Sep 15, 2006

Bank of America can’t quite save Temasek’s Merrill investment
By George White
TheDeal,com

At first glance, it looked as if the shotgun marriage of Merrill Lynch with Bank of America had bailed out Temasek Holdings, who had poured nearly US$6b into the investment bank this year, only to watch the value of its stake evaporate.

The Singapore government-controlled entity is Merrill's largest shareholder with a 7.5% (SIC) stake.

Temasek put US$5b into Merrill at $48 a share between December and February, but a reset payment for losses on the original investment and additional US$900m poured in last month.

It ended up averaging out the sovereign wealth fund's buy-in price to only $23.11 a share, based on Bloomberg calculations from exchange filings.

At Bank of America's original estimate of $29 a share, Temasek would have ended up making US$1.5b on its investment.

Unfortunately, the markets haven't been kind to the stocks of either Bank of America or Merrill.

At the end of the day, Bank of America was down $7.19 or 21.3% to close $26.55, while Merrill Lynch only gained a penny at close, ending the day at $17.06 a share, leaving Temasek's investment still well into the loss column. - George White

http://www.thedeal.com/dealscape/2008/09/bofa_buyout_cant_quite_save_te.php

Reuters also reported yesterday that the Merrill deal may ease Temasek’s pain, but risk remains.

Its correspondent, Saeed Azhar said the US$50b takeover highlights the risk that Temasek and other sovereign funds took in betting on a financial sector whose troubles are far from over.

Temasek may end up owning
Bank of America shares

He added “With an average price of between $23-$24 paid per Merrill share, Temasek could make a small paper gain given Bank of America is paying $29 a share in an all-stock deal for the third-biggest global investment bank.

Temasek will end up owning shares in Bank of America, a bank with a much bigger franchise but with the challenge of integration and dealing with Merrill's bad debts.

Reuters added: "Analysts said it was unclear if Temasek will sell or hold for the long-term.

"If you are a long-term investor and have a five- to 10-year horizon, then whether you make a profit or a loss on Bank of America's share price shouldn't be an issue for you now," an analyst, familiar with the workings of the fund, told Reuters.

David Cohen global research house, Action Economics, said Temasek could walk away from its Merrill Lynch stake with a profit, AFP reported. "It still might work out well from their perspective," he said.

If Temasek sells to Bank of America the Singaporean firm "could walk away with a profit, at least from the July commitment," Cohen said.

A Temasek spokesman declined to comment on the sovereign fund's next move.

A second source with knowledge of the fund said Temasek is waiting for more clarity from Merrill CEO John Thain on a investor conference call later on Monday.

In Dubai, state-owned investment agency Mubadala said it was not looking to bail out any financial companies in difficulty.

"There is a good amount of volatility and it is not the best time to invest," Chief Operating Officer Waleed al-Muhairi told Reuters. "Right now, we, like some others, will wait and see."

Mubadala had a 7.5 percent stake in U.S. private equity firm Carlyle Group as of February.

With Lehman Brothers filing for bankruptcy on Monday, the crisis has claimed the second major investment bank in the United States after the U.S. government backed a fire sale of Bear Stearns to JPMorgan in March.

Standard & Poor's analyst Anshukant Taneja, which rates Temasek AAA, told Reuters last month the fund's large exposure to financials increased its vulnerability to unpredictable asset cycles and contagion.

But Temasek officials said then they saw opportunities in financials and said the fund would not cap its investments in that sector, which grew to 40 percent of its portfolio in the year to end-March from 38 percent previously.

Temasek, headed by Ho Ching, the wife of Singapore's prime minister, has been expanding outside its Asian base and holds stakes in Barclays (BARC.L: Quote, Profile, Research, Stock Buzz) and Standard Chartered (STAN.L: Quote, Profile, Research, Stock Buzz).

But analysts said the changing landscape means previously strong growth in the financial sector would be crimped as banks scale back risky investments.

"The next 5-10 years will see that over-expansion reverse and it will be difficult for investors in financial assets," said Singapore-based Peter Douglas, founder of hedge fund consultancy GFIA. http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSSP21014620080915

Comments
Channel News Asia forum:

Posted by swashbuckle
Its actually a good move bearing in mind that this is a share swap, with a fixed swap ratio of 0.8595.
Temasek would now hold a decent stake in one single giant entity, which dwarfs many other competitors due to its sheer size. (Temasek has said it has decided on the next course of action.)
The new entity would have a diverse range of revenue generating assets, from its commercial banking portfolio, investment banking portfolio and wealth management operations.
Bank of America would also have access to the portfolio that contains a significant proportion of customers that are part of Fortune 500 within the US and also outside of the US, thereby allowing it to offer other banking products to increase its market share.

johnlaw2012
Only know BoFA as the bank that bought heavy Debt countrywide and Merill Lynch in the last min using their customer deposits. Its interesting to see if US home prices are going down another 50% which may bankrupt BoFA.
Balance sheet not that good mix with countrywide and Merril Lynch cannot be better than UBS. You dare to put money in BoFA?

kuala8888
This is also called the deep pocket strategy.
They have Singapore's wealth to support them.
Just delay the (CPF?) payment till age of 72... 82....102....

listed
A typical bad investment turns good suddenly.
Now they really can long BoA.
There would be BoA as long as there is America.
Channel News Asia.