Thursday, July 26, 2007

Temasek & Barclays

Earlier today, it was reported in many news sources that Temasek is taking approximately a 3% stake in Barclays, and that this injection of capital will allow Barclays to raise its bid in its acquisition battle with the Royal Bank of Scotland for ABN Amro. Well, I don't have the exact details of the transaction and I haven't done an exact valuation of ABN Amro, but intuitively, this doesn't look like a particularly good investment.

a. Firstly, there is no gaurantee that a Barclays - ABN combination will generate significant shareholder value over and above hurdle rates as a combined entity, than apart. Many mega-mergers have turned out to be big destroyers of shareholder value, think AOL-Time Warner or Daimler-Chrysler, see this post for more. Temasek is betting that 1. Barclays will be successful in its bid for ABN, and 2. an ABN - Barclays merger will go smoothly and transcend all the corporate culture and other execution issues that often plague mega-mergers.

b. Secondly, Temasek is injecting capital to fuel the 3rd bid in the Barclays-RBS bidding war. Thus, i think it would not be unfair to say that the bid is probably very close to the intrinsic value of ABN to Barclays, and there is quite a bit of a chance that Barclays is paying a sizeable premium. If that is the case, then not only does the Barclays-ABN combination not have to fail, it has to succeed wildly, with a very very narrow margin for error.

Put the two factors together, and intuitively Temasek's injection of capital into Barclays does not make sense to me. Of course I could be wrong, as I haven't done the actual number crunching. But this deal smells awfully foul.

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