M&A : Barclays orientates towards the Orient

Singapore's Temasek Holdings is no stranger to the banking sector: indeed, its figures for March 2006 - the most recent annual report available - says that of the company's SGD129 milliard holdings, 35% are in the financial sector, up from 29% in the previous year. As at that date, its holdings ranged from 59% of Danamon Bank in Indonesia, via 28% in Singapore's own DBS to 5% in Bank of China. It held other interests in China and India but its portfolio showed a glaring hole: it held nothing in EU, US or Australian financial institutions.

Today, that changed with the announcement that Singapore's primary government owned investment vehicle is to take a large slice of Barclays Bank, so enabling Barclays to increase the cash element of its offer for ABN AMRO.

But it's not just Singapore's government that wants a slice of Barclays - which some say may itself become a target for one of the USA's megabanks if the ABN AMRO bid fails - for the Chinese government has injected money too: China Development Bank is putting its hands not too deeply into the Chinese government's overseas reserves and pitching in.

Together the two investment companies have injected GBP2.6 milliard, with the promise to top that up to GBP10 milliard if the bid succeeds. If it doesn't, and Barclays does become a target, they will expect to make a significant and quick turnaround on their investments despite Barclays' already notably increased share price.

But Barclays is involved in a sort of reverse deal with China. Just as the Chinese money comes in from one direction, Barclays pays money straight to the China, buying just under 20% of New China Trust and Investment Company. This is NOT China Trust Commercial Bank of Taiwan. To be fair, this is not really news - Barclays interest in the purchase became public knowledge in May this year - but the all important regulatory approval was granted only late last week. Whether this is all coincidence remains to be seen - but there are some interesting synergies.

Barclays Capital has been aggressively expanding worldwide, and especially in the Orient. No foreign bank has so far succeeded in gaining an effective foothold in the Chinese capital markets, especially in the sale of complex financial products and certain securities, and in wealth management. China Development Bank is perhaps the most western-minded of the big Chinese banks, and has been involved in a growing number of large scale foreign investment projects. This triumvirate will prove a powerful force both in China and elsewhere. And aside from giving Barclays access to the rapidly increasing personal wealth within China, it will also give it access to the vast foreign capital built up by China and available for mega-financing deals. In one simple step, Barclays has suddenly joined the big boys in both wealth management and investment banking. And with Temasek's radar for a good deal, and ABSA (South Africa) and ABN AMRO filling in the gaps in Barclay's global network, suddenly HSBC, Citi and Santander have a new kid in the big league.

If the deal goes through.

If it doesn't then one wonders if we are poised for a Barclays break up with the investment banking and wealth management businesses setting sail on their own.

Mergers and Takeovers in the Financial Services Industry - Hong Kong 2 - 3 October 2007. Visit www.bisfaculty.com