Sovereign wealth funds (SWF) are government funds that are established for investment purposes. These funds derive their finances mostly from the natural resources available in a country such as oil and gas. Merrill Lynch in a bid to assuage their financial shortcomings engaged various SWFs, namely Mizuho Corporate Bank and Korean Investment Corporation in an investment deal. Mandatory convertible preferred stock in the value of 6.6 billion was issued to these particular entities. In connection with these several other agreements were struck. The private placements were entitled to a 9% dividend per annum, a convertible premium of 17%, maturity in 2.75 years and a liquidation preference of $100000 per share.
The pertinent question occasioning this paper is, was the deal a good deal for the sovereign wealth funds? Looking at the terms that were provided for, it would appear that the deal was a fair deal to the sovereign wealth funds and ultimately seemed like an overall bad idea for the Merrill Lynch. The 9% dividend offer was quite generous to the SWF. For instance, the dividend that yields in five years on common stock is about 1.4%. Although this was some preferential stock, the percentage offered was way too accommodative putting into consideration that the dividends were payable per annum. The rate stipulated for the conversion premium was a big plus for the SWFs. This meant that the price of a convertible security exceeded the current market value of the said security by a 17% margin.
Lock up investor were not permitted to sell, transfer or hedge their preferred stock within the year of closing thus granting them the monopoly to sell, transfer or hedge their stock within that closing year. The company gave the right to prohibit the acquisition of additional voting securities to the SWFs, who sought to have the controlling power of the organization. As it follows, it may be concluded that ultimately, this was a good deal for the SWFs. However, this was not the case for the company as they ultimately lost more than what they acquired from going into business with the SWFs above.
Works Cited
Truman, Edwin M. Sovereign Wealth Funds: Threat Or Salvation. Washington DC: Peterson Institute for International Economics, 2010.
