Published September 16, 2008


BOA move offers Temasek ticket to super league

Analysts feel it will accept chance to be part of giant entity


(SINGAPORE) Temasek Holdings is getting more than it asked for. Nine months after it bought a chunk of Merrill Lynch, it may end up holding stakes in a new financial mammoth comprising Merrill and Bank of America (BOA) if it accepts BOA's all-stock takeover offer for Merrill.

The largest US retail bank agreed to buy Merrill for US$50 billion or US$29 per share by exchanging 0.8595 BOA common stock for each Merrill share. The price is 1.8 times stated tangible book value and a 70 per cent premium to Merrill's last traded price of US$17.05 last Friday.

At US$50 billion, Merrill is being sold at about two-thirds of its value of one year ago and half its all-time peak value of early 2007.

Temasek is the single largest investor in Merrill Lynch with about 14 per cent stake after injecting some US$5.9 billion or an average US$23.11 a share since last December. When contacted, it said that 'it is premature for Temasek to comment'.

According to sources, Temasek is seeking more clarity on the deal before making a decision on its Merrill stake. It is estimated to reap paper gains of about US$1.5 billion if it takes up the BOA offer.

Accepting the offer would also give Temasek stakes in a global financial giant involved in everything from fixed-income trading to stock underwriting to credit card lending - way beyond what it asked for when it bought stakes in the brokerage-centric Merrill late last year.

In a teleconference last night Singapore time, BOA chairman and CEO Ken Lewis told analysts that Merrill has made significant progress in reducing risks and that this acquisition creates a company that will take decades to build.

'I don't know anybody who is good in picking the absolute bottom and we thought we had a compelling situation for shareholders in the long term,' Mr Lewis said.

Merrill has the largest US brokerage force of over 16,000 financial advisers. After the acquisition, BOA will be the largest brokerage in the world with more than 20,000 advisers and US$2.5 trillion in client assets and will gain leading positions in underwriting global high yield debt, global equities and mergers and acquisitions (M&A) advisory.

Merrill also owns half of New York-based BlackRock Inc with US$1.4 trillion in assets under management (AUM), which will bolster BOA's existing AUM at US$589 billion.

Some warned of the potentially higher risks in the combined entity arising from Merrill's stockbroking activities and BOA's US$4.1 billion purchase of Countrywide Financial Corp, the largest US mortgage lender plagued by housing woes.

But industry players here believed that the offer may turn out to be positive for Temasek and it is unlikely to cash out on the BOA shares if it accepts share swap.

'I think Temasek will hold these shares for the medium to long-term since the combined entity will be stronger, bigger and have a better market share,' said Eric Ng, director of private equity firm CK Capital Management.

Fundsupermart general manager Wong Sui Jau noted that disposing BOA shares in the current poor market conditions is not a viable option. 'At this point in time, the market is in no condition to accept a huge chunk of BOA shares on the market,' he said.