Thursday, December 20, 2007

SWF's, But Not The Kind You Are Thinking Of............

The U.S. "Gets Owned "

By Joel Bowman
When Abu Dhabi's state-owned wealth fund inhaled almost 5% of Citibank last month, America got a glimpse of the world to come – a world in which the asset side of the global balance sheet shifts from West to East.
Get ready to "get owned."
In a deal that took only a few days to cobble together, the Abu Dhabi Investment Authority (ADIA) sucked up 4.9% of America's largest bank for a mere $7.5 billion. ADIA receives convertible stock in Citigroup yielding 11% annually. The shares are convertible into common stock at prices ranging from $31.83 and $37.24 a share, over a period of time between March 2010 and September 2011.
At first blush, it's hard to distinguish between predator and prey. Did Abu get taken, paying $7.5 billion for part of a finance company that sits on tens of billions of toxic securities? Or did Citi get taken, paying a usurious 11% to obtain a lifeline? Or did the deal produce a near-perfect win-win result?
On the one hand, $7.5 billion seems an excessive amount to pay for 5% of a nose-diving finance company with a wave of subprime hurt still to come. On the other hand, $7.5 billion is really just a drop in the bucket if you're the world's largest sovereign wealth fund. In fact, the purchase price represents slightly more than 1% of the ADIA's assets.
In the battle for the international SWF championship belt, the ADIA throws punches in a weight class all of its own. At an estimated net value of $625 billion, it dwarfs its closest contenders. Norway ($322bn), Singapore ($215bn), Kuwait ($213bn), China ($200bn) and Russia ($127) round out the world's top five heavy hitters.
All of these funds share a similar dilemma: what to do with depreciating dollar bills.
As long as the world's reserve currency was holding its own, the SWFs seemed content to tinker with plain-vanilla investments like Treasuries. But now that the greenback and the U.S. financial sector are both plummeting like skydivers ensnarled in their chutes, the SWFs seem much more eager to exchange their dollars for riskier, non-traditional investments.
Perhaps that's why SWFs and other dollar-laden foreign investors have been snapping up Western companies left, right and center. According to the research database outfit Dealogic, foreign buyers accounted for more than one fifth of all M&A activity in the US this year, the highest level in over a decade.
Some notable bites of the all-American pie this year included China Investment Corp's near 10% purchase of the private equity firm Blackstone Group in May, the $942 million buyout of department store operator Barneys by the UAE's Istithmar Group and the $622 million stake acquired in the chipmaker AMD, gobbled up by Mubadala Development Co., another investment arm of the government of Abu Dhabi.
But these deals seem relatively quaint alongside the recent deals in the financial sector. Just a few days ago, the Government of Singapore Investment Corp. made headlines by agreeing to pay nearly $10 billion for a chunk of UBS. The purchase makes Singapore UBS's largest shareholder.
"UBS's decision to sell as much as 12.4% of the company to Singapore and a Middle Eastern investor…is the latest in a string of deals in which state funds or banks in Asia and the Middle East have take stakes in Western financial firms," the Wall Street Journal reports. "Government 'sovereign wealth funds' have invested about $46.8 billion in European and U.S. financial firms since January 2006, according to Morgan Stanley estimates."

"[The UBS deal] is a further sign of how the balance sheet of the world economy is changing," Gerard Lyons, chief economist at Standard Chartered PLC, tells the Wall Street Journal. "Also, it is a reflection of the fragile state of the financial sector in the West."
Indeed, and now that many leading companies of the Western world are clutching financial lifelines from the Middle East and Asia, humility has crept into the political rhetoric. Apparently, all those rich investors from the Middle East don't seem quite as threatening as they did last year when they were trying to buy a few American ports. In today's crisis-strewn financial landscape, the same Middle Eastern investors that most American politicians reviled as unsavory predators one year ago are now heralded as saviors.
New York Senator Charles E. Schumer's recent about-face typifies the new American perspective. "It seemed to me that this [Abu Dhabi deal] is good for Citigroup," said, the schmoozing chairman of the Joint Economic Committee and senior member of the Senate Banking and Finance Committees. "It's good for jobs in New York. It bolsters their capital position, allows what is fundamentally a very strong company to weather a difficult time."
One might be inclined to view the Senator's remarks as sincere, enlightened, or even progressive, until they are reminded that it was Schumer who introduced added amendments to a senate bill last year to block the Dubai Ports World deal.
Americans angered by the thought of foreign companies buying up their backyard won't get a reprieve anytime soon, it seems. According to McKinsey Global Institute, petrodollar reserves, of which SWF's constitute about 60% of total net worth, will grow from just over $3 trillion to almost $6 trillion by the year 2012. And here's the real kick in the shins...that estimate is computed by factoring in oil at just $50 a barrel, or about half what it costs right now!
Doubling the capital firepower of these SWFs will result in far more sizeable acquisitions. Doubling the price of oil might just prompt them to take the whole pie!
One day soon, we may find ourselves banking at the friendly neighborhood Bank of Abu Dhabi Citigroup. And yes, the bank will continue to accept U.S. dollar deposits, but dirhams would be preferred.

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