No wonder Merrill Lynch's biggest shareholder, the Singapore sovereign wealth fund Temasek Holdings, is struck speechless. It is in a billion-dollar dilemma and whichever option it chooses it wins. Temasek stands to gain $1.5 billion from the sale of Merrill Lynch to Bank of America, reports Bloomberg. But by holding on to its shares it could get a stake in Bank of America, the largest retail bank in the US. The Wall Street Journal explains Temasek's enviable position:
Temasek paid $48 a share for Merrill Lynch when it first bought the stock back in December, but downside protections built into its agreement with Merrill effectively halved the purchase price to around $24 a share in July.
With Merrill's shares down to $17.05 on Friday, even that was a money-losing position. But with Bank of America now making an offer for Merrill that values the stock at $29, Temasek could still walk away from its foray into the toxic U.S. financial-services industry smelling like roses.
Temasek remains vulnerable if Bank of America’s share price falls in the weeks ahead, cutting the price Temasek and other Merrill shareholders will get. It’ll have to drop more than 17% before Temasek starts losing money on its position — certainly not out of the question.
Still, anything less drastic means Temasek has the luxury of starting with a clean slate as it decides whether it wants to own a stake in Bank of America. Such a switch would shift its exposure away from Wall Street and more toward Main Street, with a more direct involvement in the U.S. commercial-banking, credit-card and mortgage markets. In the U.K., Temasek owns 19% of Standard Chartered and a small stake in Barclays.
“It is premature for Temasek to comment,” the Singapore sovereign wealth fund said in an emailed statement, reports Bloomberg. It must be weighing the advantages of both the options.
The Singapore sovereign wealth fund paid $5.9 billion since December for about 14 percent of Merrill at an average price of $23.11 a share, based on Bloomberg calculations from exchange filings. Temasek has invested a total of $8.3 billion in Merrill Lynch, according to AFP.
Bank of America will rival Citigroup in assets by buying Merrill Lynch, turning into a global financial services giant involved in everything from fixed income trading to stock underwriting and credit card lending, reports the Guardian. The Government of Singapore Investment Corporation (GIC), the other Singapore sovereign fund, has a 4 percent stake in Citigroup in which it invested $6.88 billion in January.
Bank of America, however, has its own problems.It has been losing money in the credit crunch, says the Guardian. Absorbing Merrill Lynch poses “huge risks”, says the Wall Street Journal in another report. Merrill had the highest ratio of “problem assets”, it adds.