Judging Temasek’s growing role in Merrill Lynch

Joyce Koh

Singapore fund’s latest investment to lift stake in broker to more than 10%

The latest investment by Singapore sovereign-wealth fund Temasek in Merrill Lynch & Co. could lift its stake to more than 10%, triggering the need for regulatory approval and reigniting debate about foreign ownership of U.S. financial firms.

Earlier this week, Merrill Lynch, the largest U.S. brokerage firm, said that it would issue $8.5 billion in new shares and sell a big chunk of its debt securities at a steep discount. Temasek is already a major shareholder in Merrill after it invested $5 billion (at $48 a share) late last year.

Temasek’s managing director of corporate affairs, Myrna Thomas, said that “a portion of [the investment] is subject to regulatory approval,” suggesting that the stake could rise to surpass 10%. Temasek earlier had sought to keep its stake under 10% following its $5 billion December investment.

Between January and May, public records indicate that Temasek sold about 5 million shares in Merrill.

A filing by Temasek with the Securities and Exchange Commission in January said that the company held 91.67 million shares, or 9.4% of Merrill, as of Dec 24. But on July 22, an SEC filing by Temasek showed it held 86.95 million shares on July 11. This works out to a stake of 8.85% on June 30.

Sovereign funds growing in size and influence

Temasek’s move is the latest in a string of investments by funds backed by governments from Asia and the Middle East in beleaguered U.S. and European financial institutions.

At the height of their troubles, Merrill Lynch, Citigroup Inc. and Morgan Stanley, as well as Switzerland’s UBS AG and Britain’s Barclays PLC received capital infusions from foreign funds.

Sovereign-wealth funds are growing at a whopping 24% a year, and could grow at that pace for at least the next three years, according to a study released in April.

The funds played a role in stabilizing the global credit markets over the last six months, injecting more than $80 billion in bank shares or bank-equity stakes in major American investment banks such as Citigroup, which received $7.5 billion from a sovereign-wealth fund in Abu Dhabi.

Citi also received a $6.8 billion investment from Singapore’s sovereign-wealth fund.

Merrill raised $6.6 billion from a consortium of funds that included the Kuwait Investment Authority, the Korean Investment Corporation and the Mizuho Financial Group of Japan.

Mixed feelings back home about Singapore investment

Views in Singapore varied as to whether Temasek was doubling down on a rare opportunity, or digging itself deeper into a hole.

Some took the view that Merrill Lynch was scrubbing itself clean of toxic debt and that weakness in its shares offered a chance to buy at a discount into a leading financial company poised for future growth. Critics of Temasek’s move suggested that more turmoil lies ahead in the financial markets and that stocks like Merrill could fall further.

“There is always a price to pay to get a stake in what is still a leading global financial institution,” Song Seng Wun, a regional economist at brokerage CIMB-GK Research told the Business Times, a local daily.

“If history is any guide, this current downturn will surely pass and when global economies are back on even keels, the likes of Merrill will rake it in. That certainly must be the long-term game plan for Temasek,” Wun added.

Others were not so sanguine, questioning Temasek’s decision to take equity in a stock that’s still struggling to find its footing.

“Given that we are uncertain as to whether there is further downside in the financial cycle, people are a bit surprised Temasek is taking equity instead of debt,” said Kevin Scully, managing director of NRA Capital, a Singapore-based equity research firm. “They are taking a view that there is a bottom in sight. But it may be a safer bet to continue to be a preferred creditor if things really tank.”

Some in Singapore worry the state-owned investment fund may be overextending itself with its involvements in distressed financial institutions like Merrill.

“It’s Singapore’s money I’m worried about,” said Dennis Distant, a retired retail investor and frequent commentator on local developments in Singapore. “If all goes down the drain, what happens?”


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