Merrill Lynch is the Latest Beneficiary of Global "Cash Barons" Move on U.S. Financial Services Sector

By Jennifer Yousfi
And Jason Simpkins
Money Morning Editors

Merrill Lynch & Co. Inc. (MER) announced Monday that it will receive a needed cash infusion of $6.2 billion - most of it from Singapore's state-run Temasek Holdings. Temasek, a sovereign-wealth fund, will invest up to $5 billion, while the remainder will come from Davis Selected Advisors LP. 

Merrill Lynch, the United States' largest brokerage firm, has seen its stock drop 40% this year and faces its worst loss in the firm's 93-year history. E. Stanley "Stan" O'Neal, former chief executive, retired at the board's urging in late October after announcing $8 billion in subprime-related write-downs.

"One of my first priorities at Merrill Lynch was to strengthen the firm's balance sheet, and today we have made great progress towards that by bolstering our capital position through these investments," John A. Thain, Merrill's newly appointed chairman and CEO, said in a statement.

The Merrill Lynch investment is the latest in a series of multi-billion-dollar cash infusions provided by the world's sovereign wealth funds. Ailing U.S. financial institutions have found the state-run venture funds to be generous benefactors.  Other recent deals have included the Abu Dhabi Investment Authority's $7.5 billion infusion in Citigroup Inc. (C), the Government of Singapore Investment Corporation's $9.75 billion stake in Europe's UBS AG (UBS), and China Investment Corp.'s $5 billion investment in Morgan Stanley (MS).

State-run sovereign-wealth funds currently control $3 trillion - a figure experts expect will soar to $12 trillion by 2015. For perspective, the estimated U.S. gross domestic product for 2006 was slightly more than $13 trillion. Some forecasts say that these "Cash Barons" will control $20 trillion by the middle of the next decade.

The Merrill Lynch deal is the latest involving a U.S. financial institution. Temasek Holdings initially will make a $4.4 billion investment in Merrill Lynch's common stock at $48 per share, and also has the option to purchase an additional $600 million of Merrill Lynch common stock by March 28.  Davis Selected Advisors' $1.2 billion investment will also be priced at $48 per share, a significant discount to the current market price. 

Both Temasek and Davis Selected Advisors will be passive investors, with no governance or rights of control, and no influence on Merrill's day-to-day operations.

With the so-called "Cash Barons" of Asia and the Middle East making such large investments in leading global banks, some shareholders have become concerned about underlying political motives of the state-run ventures.  Although the sovereign wealth investors are considered passive, without representation on the board of directors, many worry about the influence a 10% stakeholder could still exert.

UBS, one of Europe's largest and most influential banks, recently ran into resistance from shareholders over its $11.5 billion cash infusion. On Dec. 10, the bank disclosed that the Government of Singapore Investment Corporation (GIC) and an undisclosed Middle East investor were behind the investment.

While UBS - hard hit by the subprime crisis - was in dire need of the added capital, current shareholders weren't happy with the arrangement, as the move gave Singapore a 9% stake in the company, with an additional 2% position going to the mystery Middle Eastern investor.

One influential Swiss institutional investor called on fellow shareholders to block the proposal, while another demanded a special audit to investigate how the bank could have sustained such massive losses. One upset investor went as far as filing a shareholder lawsuit against UBS, claiming the bank was cloudy in reporting the subprime holdings that eventually led to write-downs.

"I believe this situation disadvantages existing shareholders," Ulrich Grete, institutional investor and head of the Swiss Social Security Compensation Fund, told the Financial Times. Grete also insisted UBS name the mystery investor, as that shareholder now possesses one of the largest stakes in the bank.

The Financial Times recently reported that the mystery investor is none other than Prince Sultan, the crown prince and defense minister of Saudi Arabia.

"It's a reasonable assumption the ruling family was involved and approved [the deal]," a source with knowledge of the negotiations told the widely read business journal.

Separately, the Ethos Foundation, a Swiss investment lobby, said it would ask the bank to clarify its $14 billion loss from U.S. subprime mortgage investments. UBS said it would "carefully answer all Ethos' questions."

Dominique Biedermann, an Ethos director, said the plan to make Singapore the largest UBS shareholder at 9% was "not necessarily ideal."

Money Morning Executive Editor William Patalon III contributed to this report.
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