Merrill deal may ease Temasek pain, but risk remains

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Tuesday, 16 September 2008

Saeed Azhar
Reuters

Bank of America's purchase of Merrill Lynch in a $50 billion deal highlights the risk Singapore's Temasek and other sovereign funds took in betting on a financial sector whose troubles are far from over.

The $131 billion Singapore state fund has ploughed over $5 billion into Merrill, but the value of the investment plunged when the U.S. bank suffered massive losses from risky housing debt, before Merrill agreed to halve Temasek's purchase price in July.

With an average price of between $23 and $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. 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.

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 and Standard Chartered .

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

Bank of America buyout can't quite save Temasek's investment in Merrill
George White
TheDeal.com

At first glance, it looked as if the shotgun marriage of Merrill Lynch & Co. with Bank of America Corp. had bailed out Temasek Holdings Pte. Ltd., who had poured nearly $6 billion 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% stake. Temasek put $5 billion into Merrill at $48 a share between December and February, but a reset payment for losses on the original investment and additional $900 million poured in last month 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 orginal estimate of $29 a share, Temasek would have ended up making $1.5 billion 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.

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

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Comments (13)

Wed 17 Sep 2008 10:03 AM | Jason Teo

I am glad that Temasek has proven itself to be capable. Earning $1billion in paper profit is not bad considering the market environment now is very bad.

Also I like to wish my beloved Minster Mentor LEE KUAN YEW a very happy birthday.

I hope we all will have many more good years in Singapore

Wed 17 Sep 2008 4:16 PM | Mad Cow Gov t - Sick Govt

[color=red][b]Why won't Minister Mental have good years earning such good healthy monies every end of the month???

How much do you or I earn at the end of the month? How much do you or I save at the end of the month?

Just look at the transport cost? Which country keeps increasing every bi-monthly-its either taxi or buses/mrt etc??????????[/b][/color]

Wed 17 Sep 2008 5:07 PM | novoice - Pricing increasing bi-monthly?

I am not in Singapore, are the increases so bad?

If Temasek actually comes out as a winner, kudos to them.

Wed 17 Sep 2008 6:23 PM | Jann

Bloodbath, Bloodbath! There's going to be more of in the next couple of months.

so what... Temasek owns some Bank of America shares right now? I have an acc. w/ Bank of America and I know they are not good with certain things. Pulling out right now would only mean more loss. And if anyone is wondering... things arent looking that great in the U.S. This economy will take about a year and more to recover.

Wed 17 Sep 2008 6:38 PM | Uncle Ver SG

[quote]At Bank of America's orginal estimate of $29 a share, Temasek would have ended up making $1.5 billion 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.[/quote]

Its not even a net (paper) profit of $1 billion when they first bought Merill Lynch at $48 for $5 billion. What happened to the long term investment goal oft stated by You Know Who, when the asset they bought (investment bank) turned into another kind (commercial bank). Did they even contemplate such a development in the first place? If they sell the shares to cut their losses, the BS about long term investing gets thrown out the window. Another "honest mistake"?

What a surprise: PAP Internet Brigade wishing the King of Singapore "Minister Mentor" LKY a happy birthday and many more years of incompetent, bloated bureaucracy.

Btw did GIC own any Lehrmann shares? Can someone enlighten me?

Wed 17 Sep 2008 7:39 PM | ForeignerPR - Why no praises for what LKY has done?

[quote]Why won't Minister Mental have good years earning such good healthy monies every end of the month???

How much do you or I earn at the end of the month? How much do you or I save at the end of the month?

Just look at the transport cost? Which country keeps increasing every bi-monthly-its either taxi or buses/mrt etc??????????[/quote]

Why won't Minister Mental have good years earning such good healthy monies every end of the month??? - Did you forget that he plays a very important role in strategising the policies for the future of Singapore? He very much deserves what he earns. There are certain flaws, i agree, but do you know what Singapore was 40 years ago and what it is now. Do you realise that LKT has built Singapore inspite of lack of resources. Wake up - after all Singapore is a country, its not heaven-perfect.

How much do you or I earn at the end of the month? How much do you or I save at the end of the month? - People do earn a lot of money in Singapore. Have you seen the bungalows at Bukit Timah? Cost of living in Singapore is high, so is the case in UK and EU. You can also find beggars in US and get shot while walking the road there. In UAE also, more than half of one's salary goes in accomodation and food, only transport is cheaper.

Just look at the transport cost? Which country keeps increasing every bi-monthly-its either taxi or buses/mrt etc??????????- You tell me which country has absolutely no natural resources like Singapore and has a GDP or quality of life equivalent to that of Singapore?

Wed 17 Sep 2008 8:19 PM | Mike - Why you all like tat?

Why are some people here so keen to see Temasek losing money?

Isn't it bad for Singapore & Singaporeans..?

why are you like tat?

Wed 17 Sep 2008 8:41 PM | Uncle Ver SG - Correction

Merrill Lynch's top shareholders
Winners and Losers from the Bank of America buyout
Investor Ownership* Profit/(Loss)
Temasek Holdings Pte. Ltd. 5.7% (785,154,816)

Position as of July 2008.

Paper loss of US$785 million, so far...

Thu 18 Sep 2008 1:55 AM | David

No wonder Singapore is so full of stupid people.

Look here,all dickheads who sing the praise of PAP's investment.

Suppose you invest in Company A with many rounds of money that amount total to $10 million for last 5 years, but in the last round of invesment of around $3 millions,you get a profit of $1 millions, and the newspaper blatantly state that the company has earned $1 million from $3 millions, do you believe that ?

How about the previous-loss ? Is it a writeoff ? In other words, you have invested $10 millions, ,and return back $1 million as profit but with loss of $7 millions and then proclaim that it is a profit from $3 millions without reference to previous loss.

ARE YOU PEOPLE REALLY MORON ?
No wonder Singaporean is so gullible and naive. They really deserve their world-class gov.

LONG LIVE SINGAPOREAN !

Thu 18 Sep 2008 4:34 AM | Uncle Ver SG

[quote]You tell me which country has absolutely no natural resources like Singapore and has a GDP or quality of life equivalent to that of Singapore?[/quote]

Monaco, Lichenstein, Hong Kong.
What quality of life? Getting robbed by the state or in some cases robbed via lawsuits not enough for you? In the USA, some would argue that gun ownership would lower the crime rate and that the lack of gun ownership is one of the reasons driving up crime rates.

[quote]Why won't Minister Mental have good years earning such good healthy monies every end of the month??? - Did you forget that he plays a very important role in strategising the policies for the future of Singapore?[/quote]

I bet in your opinion he helped to invent the internet as well. Or even predicted such a thing as the internet, Wikipedia, Google etc. democratization of information.

Excuse me I thought LKY is the mouthpiece unlike the other old guard who were the actual brains behinds Singapore's initial success. Those poor fools must have regretted "serving the country" and didnt rake in the millions and millions the so called 2nd gen "leaders" are making now.

Lets not look to the past and look instead to the future. LKY is a 84 year old man, even older than Mugabe, and have no new ideas, yet he exerts so much control. Moreover he commands a party where people think that a white knight bailout of a failed investment is an indication of capability, not luck.

You want to trust these people? Be my guest.

PS To the Internet Brigade, if you are ever so lucky as to serve coffee on your knees or shine your SupraBoss's shoes, dont call him Minister Mental.

Thu 18 Sep 2008 5:34 AM | Anonymous

[quote]
Why are some people here so keen to see Temasek losing money?

Isn't it bad for Singapore & Singaporeans..?

why are you like tat?
[/quote]

Hi Mike,

why you so keen to go geylang?

Thu 18 Sep 2008 10:54 AM | ah beng - geylang Mike

Yo Mike, you always go geylang, is this true? You are supporting undesirable vises, you can be detained under ISA. Better don't pray pray.

Thu 18 Sep 2008 11:36 AM | curious

i am incredibly intrigued by how sdp will have to eat their words alive when this deal starts to show its merits and validity.

sdp should not try to play economic experts for clearly they are lacking the strategic competencies temasek boost; look at the track record, it settles a lot of things based on hypothesis. and sdp's hypothesis versus the one from temasek, i think it is obvious to all which will be the more superior one.

sdp should focus on politics, on improving itself, and not at trying to play financial analysts and jump on anything and everything just to undermine the government, even when there is really nothing much to undermine about.