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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.
Bank of America buyout can’t quite save Temasek’s investment in Merrill
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.