Merrill Lynch wins TSMC placement

In a closely fought fight between 10 banks Wednesday night, Merrill Lynch has won the books for a block sale of TSMC shares held by the National Development Fund, after pitching a razor thin discount to the stock's previous sale. Having submitted a $20.80 bid, at a 0.86% discount to Tuesday's $20.98 ADR close, the bank just pipped Goldman Sachs, which is believed to have bid only marginally behind.

"Merrill's is likely to view this as a major coup," comments one observer. "It's a client they've been desperately trying to break into for some time."

For Goldman, on the other hand, the loss of the deal is likely to be a disappointment since the bank has led every single international capital markets transaction in the company's name since the latter’s listing on the New York Stock Exchange back in October 1997.

Because of the closely fought nature of the deal, there was also some concern among Asian equity capital market bankers at how successful it was going to be at such tight levels. The last two block trades for selling shareholders in 2000 and 1999, for example, were both conducted at wider discounts in far easier markets.

Last year's $207 million block, which included Merrill Lynch as a senior co-lead, came at a 2.6% discount, while 1999's $300 million sale came at a 5.6% discount.

For the lead, key to ensuring success was getting the deal out before New York opened and hedge funds could start shorting the ADR in earnest. The deal was consequently placed out at $20.80 per ADR within 45 minutes of books opening at 8.00pm and was marketed on a first come first served basis for the first twenty odd minutes, followed by an accelerated bookbuild to close.  

Placed under rule 144, the offering raised proceeds of $291.2 million and resulted in the Development Fund's stake dropping from 12.5% to 12%. Observers report that the book was secured by a handful of anchor orders above the $50 million mark, with a total of 75 to 80 accounts participating. By geography, allocations were split 25% for Asia, 10% for Europe and 65% for the US.

In relation to TSMC's domestic close, the deal secured an impressive 51.6% premium. Year-to-date, bankers say this is about average for the ADR, which has veered from a high of 75.4% on April 30, to a low of 35.6% on February 6.

Because the stock led a rally in the Taipei Weighted Index Wednesday, there was, however, a little bit more elasticity in the placement price that it first appeared. Having consistently outperformed the overall index, despite uncertainties surrounding the semiconductor cycle, the stock closed Wednesday at NT$93.5, up 2.8% on the day. Year-to-date, TSMC was also up 19.11%, compared to a 10.157% rise for the overall index.

The sell-down was launched off the back of positive news from shareholder Philips that it is placing an order with the company for a new chip. For investors, a buy order would have turned on their house view about the bottom of the semiconductor cycle.

In recent weeks, TSMC CEO Morris Chang has made a number of statements to the effect that the bottom of the cycle has either been reached, is very near, or will have turned by the third quarter. Bankers report that the market is now starting to swing behind him.

As one puts it, "Clearly, there have been a number of differing views, but there does seem to be some momentum gathering behind a more optimistic stance. Until only about a week ago, there were still a number of concerns, but this week in particular, there seems to have been a shift the other way."  

The 10 banks that submitted bids by the 6.00pm deadline were Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, ING Barings, JP Morgan (a late entrant), Merrill Lynch, Morgan Stanley, Nomura, Salomon Smith Barney (conflicted out with its Hynix GDR) and UBS Warburg.

Under the company's articles of incorporation, shareholders are allowed to sell a percentage of their stake in ADR format every quarter. Typically, this has resulted in the National Development Fund making one block trade per year.

Syndicating the deal under rule 144 entails a number of complications for the lead manager, however. Chief among these is a prohibition on pre-marketing ahead of launch and issuing a transaction that exceeds more than five days turnover.