SingaporeƆs great bank-off

OCBC wants to buy Keppel. DBS wants OUB. Now UOB wants OUB. What''s happening to the Singapore banking market?

The announcement by United Overseas Bank (UOB) that it wants to buy its competitor Overseas Union Bank (OUB) took few by surprise. Ever since OCBC announced its intention to buy Keppel Capital Holdings over two weeks ago, there has been something of a frenzy in the Singapore banking market. After some initial speculation, DBS announced a S$9.4 billion bid for OUB.

Meanwhile, the silence from UOB was deafening. Many analysts predicted that if the two announced deals – between OCBC and Keppel and between DBS and OUB – had gone ahead they would have resulted in UOB being so squeezed by the two new giants that it would have gone out of business. A deal was vital for UOB’s survival.

Hence its bid yesterday took none by surprise. What was surprising were the terms that were offered and the amicability of the offer.

UOB has offered S$10 billion ($5.5 billion) to buy all the shares of OUB. This S$10 billion will come from an offer of S$4.02 and 0.52 UOB shares for each OUB share. That is a 6% premium to the last traded price of OUB stock and nearly a 6.5% premium to DBS’s bid of a week ago.

Moreover, the rival DBS bid had much more unattractive terms for the shareholders of OUB. At S$1.14 in cash and 0.61 of its own shares for each OUB share, DBS’s deal has only 28% of the cash component of the UOB offer. It is now unclear what DBS plans to do – whether to up its offer or to walk away.

Meanwhile at a press conference in Singapore, the two controlling families of UOB and OUB made a great show of togetherness, stressing the amicability of the deal. This is significant as the management of OUB control large amounts of the stock. The publicly available figure is that OUB founder and chairman Lien Ying Chow personally owns 15.72% of the stock and crucially has agreed to sell it to UOB.

That makes any counter bid by DBS very hard to imagine. The bank would have to get almost all the remaining OUB shares to force an unconditional offer. To do so, it would have to dramatically increase its offer both in terms of size and cash component, which would make the deal very expensive indeed.

Perhaps DBS never really had any intention to purchase OUB. Perhaps it was put up to the job by its controlling shareholder – the Singapore Government. If it made an offer to buy OUB, that would force UOB to make a counter offer. This could explain the hostile and unfriendly attitude that DBS has taken to the deal, stressing job cuts and branch closure, for instance. It might also explain why it offered such relatively unattractive terms as well as why the bank made an offer at the same time as it was closing its acquisition of Dao Heng Bank in Hong Kong. And why the Singapore offer was so markedly more unattractive than the offer it was making for the Hong Kong bank. Its offer for OUB was around 1.8 times book whereas it was paying 3.3 times book for Dao Heng. Those are not the kind of terms that would have led the management of OUB to recommend the deal to its shareholders.

So with DBS as stalking horse, OUB as sacrificial lamb and UOB as potentially the second strongest bank in Singapore where does it leave the guys who set the whole thing off? OCBC’s bid for Keppel now looks stronger than ever. It appears that it is unchallenged by any other Singapore bank as analysts do not expect a counter offer by DBS. No foreign bank is allowed to make an offer and so it is now up to the management of Keppel to recommend to its shareholders whether to accept or reject the offer. Keppel has so far kept silent on the issue just urging its shareholder to do nothing until it makes a formal recommendation.

The Singapore government meanwhile must be viewing the scene with some satisfaction. The government has long claimed that it wanted to reduce the number of banks. The widely touted figure has been two banks, but two doesn’t really make for real competition, but more a duopoly. If the present acquisitions go ahead, there will be three, nearly equally sized banks all competing. And that would be as good for the consumer and Singapore as two oversized banks and one minnow.

The Holy Trinity - (potentially) Singapore's Big 3








DBS (including Dao Heng)

S$145 billion




UOB (including OUB)

S$113 billion




OCBC (including Keppel)

S$85.7 billion




Source: Bloomberg





The competition from foreign banks is likely to remain subdued. At the Association of Banks in Singapore annual dinner on Friday night -- Friday was a very busy day for bankers in the Lion City -- DPM Lee Hsien Loong announced plans to allow two more foreign banks to gain full retail banking licenses and to allow the four existing foreign banks to extend the ATM network and open more branches. This is hardly the kind of market liberalization measure to get anyone excited and certainly not enough to shake the dominant Singapore banks from their dominance.

Where foreign banks have played a part is in the advice they have given the domestic banks in their dating games. UBS Warburg is advising OCBC. JP Morgan is advising Keppel Capital Holdings. Goldman Sachs is advising DBS. Merrill Lynch is advising UOB. And Morgan Stanely is advising OUB. All the banks are very keen on these mandates because not only will they get fees from the M&A but they will also be handed lucrative capital markets mandates – in effect scoring double points for the deal.

UBS Warburg is already doing well as it has sold $1.8 billion of bonds for OCBC to finance its bid (see related article). The other banks advising the acquirors must be hoping that their offers are successful. UOB has already announced that it intends to finance its acquisition of OUB by a new share sale and a tier two bond issue which could bring lucrative fees to Merrill Lynch. DBS CEO Phillippe Paillart has been in New York this week meeting equity investors and Goldman Sachs would handle any such sale.

Goldman’s role with DBS is interesting, given that in the US it is widely known for its expertise in acting for the target company and usually in a defensive situation where the takeover is hostile. In Asia, however, it tends to act for the companies starting off big hostile takeovers. Last year, Singtel made its audacious bid for Hong Kong Telecom, which was eventually bought by PCCW. Goldman advised Singtel. If DBS fails to get OUB, then it will be the second time that a big M&A deal has been started by a Goldman-advised client which another acquirer has then won.


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