Taiwan government raises $320 million from TSMC ADR

Goldman Sachs secures the deal after pitching its winning bid at an aggressive discount to close.

The US investment bank re-gained its stranglehold over business in TSMC's name last night (Tuesday) winning an auction to place out 20 million ADR's for Taiwan's National Development Fund. In doing so, it is believed to have beaten four other banks comprising Deutsche Bank, Merrill Lynch, Salomon Smith Barney and UBS Warburg.

Even though the deal was in the name of the government, winning will have been extremely important to Goldman given its close relationship with TSMC, whose CEO Morris Chang was recently elected to the bankÆs board. However, a number of rival firms questioned the logic of its aggression in the face of a falling market and there was also widespread uncertainty at the amount of the deal actually placed with investors before the book was closed at 9.15 am New York time.

Goldman sold ADR's at $16.05, a 0.9925% discount to the previous night's $16.17 close. Such has been the competition to win TSMC-related business in recent years, that the discount needed to secure books has become ever tighter. In 1999, for example, a $300 million sale came at a 5.6% discount close, while a $207 million trade followed in 2000 at a 2.6% discount and a $291.2 million issue in June this year at a record tight 0.86% discount.

Merrill Lynch's determination to ease out Goldman and its subsequent price judgment appeared to pay off as the 14 million ADR deal continued to trade up in the immediate aftermarket. The bank also had slightly more room to play with than it initially seemed as the stock had closed up 2.8% in the local market prior to the launch of the placement.

Where yesterday's placement was concerned, the stock had traded down 6.3% in the local market to close at NT$74.50. The overall market also fell 2% in a decline attributed to short-term profit taking ahead of the long holiday weekend in the US and a rotation from tech to banking stocks.

As a result, TSMC's ADR also opened down at $15.61, a roughly 3.7% decline to the previous close and a 40% premium to the local stock. ECM professionals reported that few funds appeared willing to buy the new deal, or had been approached by the lead. The success of Goldman's strategy may, therefore, have hinged on two key factors - its position in the stock prior to the placement and a willingness to commit capital to ride out potential upside and sell down in a stronger market.

This would be borne out by the fact that most analysts have a positive long-term view of the stock, but remain uncertain about its price performance over the shorter-term given its 75% surge over the past six weeks. Year-to-date, the stock is up 32.87% compared to a 5.978% decline in the Taipei Weighted Index.

As one commentator explains, "The stock is still trading on an extremely attractive valuation compared to historic levels. It's currently trading at 4.8 times price-to-book against a historical average of 5.9 times. It you multiple the current value of the book by this latter ratio, you come out with a target price of NT$100, which shows a lot of upside."

Positive momentum in the stock is being pushed by stronger than expected third quarter results, increasing market share over rivals and a growing backlog in foundry orders indicating a bottom to the semiconductor cycle. Analysts consequently conclude that the company will report capacity utilization rates creeping back up towards 50% by the end of the fourth quarter, compared to 41% during the third quarter.

The placement represented 1% of the company's equity capital and roughly four days trading volume.

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