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'Masters of the universe' behind BCA sale

Investors and analysts in Asia are scrambling to find out what they can on the BCA sale and dark horse Farallon
Investors and analysts in Asia are scrambling to find out what they can on the BCA sale and dark horse Farallon  

Analysis by Alex Frew McMillan

HONG KONG, China (CNN) -- A team led by U.S. hedge fund Farallon Capital proved the surprise winner of Indonesia's largest bank last Thursday.

Farallon came from behind to beat the favorite in the bidding, British bank Standard Chartered (full story), for Bank Central Asia.

That's despite Farallon's $531 million offer being lower than Standard Chartered's bid.

It was also the second time Standard Chartered missed out on breaking into Indonesia's banking big-time, after a deal to buy Bank Bali collapsed in December 1999.

Analysts have scrambled to find out what they could about the Farallon fund, which does not have so much as a Web site. San Francisco, California-based Farallon has deferred inquiries to an outside spokesman.

BCA Sale: The players 

So why did Indonesia pick Farallon in the most significant privatization since the country nationalized almost all its banks during the Asian financial crisis?

An $8 billion hedge fund

Farallon is an $8 billion hedge fund. More precisely, it is an arbitrage fund, meaning its small team, some 40 strong, specializes in picking up strategic stakes in companies on the cheap.

"They are one of the biggest and best-respected hedge funds in the United States," one trader who wished to remain anonymous told CNN.

Laksamana, who oversaw the BCA sale, explains the motives to an investor conference in Hong Kong  

The full name of the entity buying 51 percent of BCA is FarIndo Investments Ltd.

The other part of the team is the Hartono family, which owns cigarette maker PT Djarum -- a company famous for its clove cigarettes of the same name.

FarIndo, a joint venture holding company, pledges to let BCA operate under strategies put in place by current management. It has promised not to lay anyone off over the next two years.

What happens then is likely to depend largely on Farallon. Indonesia says the Djarum investors will hold less than 10 percent of the bank.

Farallon was founded in 1986 by investment banker, Thomas Steyer, and his connections at Goldman Sachs, where he worked at the time.

'Risk arb'

After starting in mergers and acquisitions at Morgan Stanley, Steyer cut his teeth at Goldman during the go-go 1980s. He still has last call on all of Farallon's deals, as senior managing member of the partnership.

His skill is risk arbitrage, or "risk arb."

Selling Indonesia's largest retail bank brings much needed cash to President Megawati and keeps the IMF happy  

Numerous hedge funds have set up to do that in the United States, so Farallon is looking further afield. Investment bankers say the best "risk arb" opportunities lie outside the United States right now.

Steyer, who went to Yale and serves on the board of Stanford University's business school, where he got a graduate degree, now oversees a large pool of institutional and private money at Farallon.

The cash comes from universities and the like, as well as personal stakes from very wealthy bankers. Those Wall Streeters are the type of people that author Tom Wolfe dubbed "masters of the universe" in his 1987 novel Bonfire of the Vanities.

A risk worth taking

Despite the pledge not to cut jobs, Farallon almost certainly has what is known as an "exit strategy," a way to get out of the investment at a set time, at a profit.

Investment industry insiders say that most likely means cutting costs and jobs in the end. That fear forced a delay in the sale (full story).

International observers grew frustrated by a lack of progress under Megawati's predecessor, Abdurrahman Wahid (r)  

Still, that does not necessarily bode ill for the bank. The BCA investment may well be the start of an influx of overseas cash. It certainly means Indonesia looks cheap to some.

"They're very, very smart, and they've done their homework," the trader said. "The fact that they're buying stuff in Indonesia probably means that you should be doing the same. Or I should. Or the price is way wrong."

But there is a good chance the price is not wrong.

"They just want to buy cheap assets. They want to get decent returns for their money," he explained. "If they can get a 15, 20, 25 percent [profit] with reasonable risk profile, between 70 and 80 percent in their eyes, they would be willing to take a shot."

Dissent in the decision

The final decision seems to have made most of the main players happy. Farallon is being advised by Deutsche Bank, which likely helped win over the International Monetary Fund.

Deutsche Bank's head of Asian operations, Hubert Neiss, used to work at the IMF and says he lobbied Indonesia on Farallon's behalf.

The IMF demanded the sale of BCA as a stipulation of its $4.5 billion loan program. Its lead representative in Indonesia welcomed the deal as an "important step" to recovery.

Still, Farallon's victory doesn't make everyone happy. One British fund manager called the result of the sale "disappointing."

"They will sell on BCA in a couple of years, to make a quick buck," the Invesco fund manager told CNN. "It would have been better to have a bank buy it for the long haul."

Most observers have faulted StanChart for "missing out" on buying big in Indonesia again with BCA. But that may not be the case.

London-based StanChart may have learned from its 1999 fiasco trying to buy smaller Bank Bali. It agreed to buy 20 percent with an eye toward a larger stake, then saw the whole deal sour amid scandal and accusations of graft.

"I'm not sure about the [StanChart] bid and why they lost out," one lawyer who works with StanChart told CNN. "Probably they know more about Indonesia and the potential for icebergs below the surface."

Eventually, Laksamana Sukardi, Indonesia's Minister of State Owned Enterprises, pushed through the sale to Farallon (full story).

"It is hard to find fault with the process," one source close to the deal told CNN. "It's hard to say that it was anything but clear and transparent."




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