Monday, June 19, 2006

Temasek - Oops, I Did It Again!

Temasek, the investing juggernaut, sometimes regarded as brusque in its M&A dealings, may have inadvertently stepped on a landmine without realizing. First, a backdrop, Temasek has shown an insatiable appetite for banking acquisitions. Over the last 36 months, it has bought either a controlling/substantial interest or was part of a consortia in buying the following banks: Bank Danamon (INDON), Bank Indonesia International (INDON), ICIC (INDIA), China Construction Bank (CHINA), Bank of China (CHINA), Minsheng Bank (CHINA), NDLC-IFIC Bank (PAK), Alliance Bank (MAL), … and the recent acquisition of Standard Chartered Bank Plc.

Temasek is a major shareholder in Malaysian Plantations Bhd, which is the sole owner of Alliance Bank, the ninth-largest bank in Malaysia. Back on 10 November last year, Temasek had sold 40 mln shares hurriedly in Southern Bank Bhd to reduce its holdings in Malaysia's second-smallest bank. The sales were aimed at complying with Bank Negara regulations. The sale is believed to have reduced Temasek's direct interest in SBB to 1.7%. Temasek is said to have contravened Malaysia’s Banking & Financial Institutions Act (Bafia) on two counts. One for having a stake exceeding 5% in SBB without getting prior approval from the central bank, Bank Negara. Two, for holding a stake of more than 5% in two financial institutions, also without approval from Bank Negara. Temasek over-stepped the line when it accumulated an additional 16.9 million shares in SBB from 24-28 October last year. The purchases pushed its total stake to 110.95 million shares or a 7.58% stake.

March this year saw Temasek securing its financial jewel in the crown when it bought nearly 12% of Standard Chartered Bank in a deal worth an estimated US$4 billion. While Temasek has indicated that it does not plan to interfere in the day-to-day operations of the companies in its global portfolio, Temasek is the largest single shareholder in the bank. Now, the issue is that Temasek still "controls" Alliance Bank in Malaysia, and Standard Chartered Bank has an enviable presence in Malaysia too. Now, doesn’t this put Temasek squarely back to the similar situation with SBB/Alliance Bank just a few months back. Surely Temasek will have to dispose its 15% stake in Malaysian Plantations. But the silence is deafening from both sides of the causeway. Could Bank Negara's silence mean that they approve of a foreign entity owning two "controlling" blocks in what are technically two banks in Malaysia - most people would not think so. Is the silence from both sides an indication of slackness from both institutions?

Bank Negara has stated before that it will take stern action against any parties that have breached Bafia. Temasek got off lightly with the SBB episode. To get back into hot waters so soon after your knuckles have been rapped must be unthinkable. Bank Negara, surprisingly has not said anything, and neither has Temasek. It looks like Temasek has stepped on a landmine unwittingly and should not lift its foot until it has drafted a proper proposal to sell down its stake in Malaysian Plantations quickly.

A proper proposal to ensure that Temasek does not breach Bafia rules (or banking rules in any country) should have been in place the moment the Standard Chartered deal has been struck. Its been nearly 3 months and in between, Malaysia and Singapore have had problems with the new causeway bridge, supply of sand and airspace issues. The silence is even more unbearable.
The people responsible at Temasek for M&A activity should really do an internal audit on the due diligence processes and their investment banking knowledge. This is not the first time mistakes have been made.

Lets review:
1) SBB/Alliance Bank (Malaysia) – Bought above the 5% threshold in SBB

2) Standard Chartered/ Alliance Bank – Similar situation as above and no immediate rectification proposal (from Temasek) or clarification seems to be forthcoming from Temasek or Bank Negara

3) Shin Corp (Thailand) – Failure to notice Thaksin’s weakening political standing. Failure to anticipate the political backlash in Thailand. Failure to notice the need to sell off Shin Corp’s stake in AirAsia Thailand till after deal is done, then had to dispose the stake hurriedly. Failure to structure a less contentious deal on a major company to placate the citizens of Thailand. Why did Temasek get waivers to avoid making a mandatory tender for two of Shin Corp’s subsidiaries? This probably gave Thaksin detractors more ammunition. Buying a company that basically operated from a concession from the government, surely the people of Thailand would not be happy about that.

A few heads should roll at Temasek as the cases cited above indicate that there appears to be: a definite lacking of thoroughness in M&A processes; regulatory due diligence checks and controls are found to be wanting; and a general lack of sensitivity to political and public sentiment in carrying out their M&A acitivity.

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