Temasek's notional gains on Merrill Lynch investment may still evaporate

16 September 2008

Mumbai: Bank of America's $50-billion acquisition of the battetred Merrill Lynch may give Singapore's Temasek, the largest single investor in the US bank, with a 14-per cent stake, a notional $1.5 billion gain on its near $6 billion investment.

Bank of America's offer price, which values Merrill Lynch at $29 a share, may give Temasek some solace. But, for  the Singapore government-controlled Temasek and most other sovereign funds, which bet on a financial sector whose troubles were far from over, the risks remain.

Temasek originally invested $5 billion in Merrill at $48 a share between December and February, but a reset payment for losses on the original investment and additional $900 million investment pared the acquisition price to just over $23 a share.

At Bank of America's offer price of $29 a share, Temasek would have made a $1.5 billion profit on its investment. But, with the stock currently ruling at  $17.06 a share, Temasek's investment could still run into a loss.

The acquisition pulled down Bank of America stock also, which was down $7.19 or 21.3 per cent at $26.55.

Temasek will end up owning shares in Bank of America, but the challenge of integration and dealing with Merrill's bad debts may drag bank of America shares  down over time.