By Gordon Platt

Sovereign wealth funds could play a big supporting role as global mergers and acquisitions try to get back on track following a dramatic slowdown in M&A; activity during the credit crisis and global recession. While they are not about to become swashbuckling barbarians at corporate gates, SWFs are joining together in “clubs” to cooperate on strategic investments and takeovers.

Sovereign wealth funds could play a big supporting role as global mergers and acquisitions try to get back on track following a dramatic slowdown in M&A; activity during the credit crisis and global recession. While they are not about to become swashbuckling barbarians at corporate gates, SWFs are joining together in “clubs” to cooperate on strategic investments and takeovers.

Qatar Holding, the investment arm of Qatar Investment Authority, joined China’s SWF, China Investment Corporation (CIC), in late August to purchase a $448 million issue of preference shares in UK-based property firm Songbird Estates, the owner of much of London’s Canary Wharf. Qatar aims to become the largest shareholder in Songbird.

“This transaction represents an important step in our drive to build up a diversified portfolio globally of the highest-quality assets across a broad spectrum of asset classes,” Ahmad Al-Sayed, CEO of Qatar Holding, said in a statement.

In June, SWFs from China, Kuwait and Singapore emerged as the deep-pocket backers who enabled BlackRock’s acquisition of Barclays Global Investors for about $13.5 billion. SWFs are increasingly working together to achieve their commercial objectives, according to a survey released in July by UK-based University of Oxford. The operations and strategies of SWFs remain, in many cases, guarded secrets, it said.

China’s foreign exchange reserves have passed $2.1 trillion, and CIC could seek more capital to deploy in lower-cost acquisitions in the wake of the global financial crisis. As central banks amass reserves that are more than sufficient to meet their near-term needs, they are seeking higher returns than are available on US treasury securities.

Second-Quarter Rebound

Global corporate M&A; activity involving SWFs rebounded sharply in the second quarter of 2009 to more than $3.6 billion after falling to $1 billion in the first quarter, according to Thomson Reuters. However, the total remained well below the $19 billion recorded in the fourth quarter of 2008. SWFs’ financial investments in troubled US financial services firms were welcomed at the height of the crisis, but issues of disclosure and intent could become more controversial as M&A; activity accelerates and broadens in the future.

“From the times when kings invested in building pyramids, raising armies and bankrolling explorers, sovereign wealth attracted political controversy,” says Alexander Mirtchev, president of Krull, an advisory and project management firm based in Washington, DC. “But sovereigns have changed with the times and today represent internationally legitimate public authorities,” according to Mirtchev, who is an independent director of Kazakhstan’s SWF, Samruk-Kazyna.

“Cooperation among SWFs and their managers on different projects represents a sign of their maturity as investors who have become more aware of the market opportunities,” Mirtchev says. “On certain occasions, it could help funds to become market leaders in specific sectors,” he says.

The primary advantage of forming clubs is to spread the risk while increasing potential profits, Mirtchev says. Meanwhile, the co-financing is welcome at a time when lack of financing is the biggest impediment to dealmaking.

Perceptions Change

The investment and political environment in which SWFs are operating has changed dramatically as a result of the global financial crisis, according to a report released in August by State Street, Boston-based provider of financial services to institutional investors. “The unprecedented events within the financial marketplace have significantly changed both the public perception of sovereign wealth funds and the way the funds perceive their own role as very large institutional investors,” says Jay Hooley, president and chief operating officer of State Street. SWFs are facing sizable challenges and opportunities, he says.

The post-crisis reality has created an excellent basis upon which SWFs and the rest of the global financial community can further their cooperation and forge a mutually beneficial coexistence, the State Street report says. “Given the vast pool of assets they represent, SWFs will be important participants in shaping the future of global finance,” it says.

With nearly $3 trillion in financial resources, SWFs are playing a growing role as cross-border investors, and this has provoked considerable debate across the industrialized world, according to State Street. “The rapid growth of these funds, and their status as sovereign-owned asset pools that are neither pension funds nor traditional reserve assets, has ignited a spirited discussion about their governance, accountability and transparency, as well as the appropriateness of government control in investment decision-making,” it says. “These funds raise many issues of international economic policy, but critical to maintaining global prosperity and market efficiencies is maintaining the openness of host and recipient economies and financial systems to cross-border trade and investment,” the report says.

Best Practices Evolve

The International Monetary Fund and the Organization for Economic Cooperation and Development are examining these issues and are developing voluntary best practices for both SWFs and the countries receiving their investments. By providing liquidity and capital to world markets, SWFs can enhance the operation of markets, lower equity financing costs and provide support to equity valuations, State Street says.

Much of last year’s deal activity in the financial services sector involved SWFs taking minority interests in banks seeking capital injections. However, the appetite of SWFs to invest in the US banking sector has diminished significantly because of losses taken on the investments made in 2007 and early 2008, according to a report by PricewaterhouseCoopers. Inbound deal activity in the US financial services industry is likely to come from the stronger Asian strategic buyers, while the European financial services companies continue to focus on addressing their own issues, it says.

The largest M&A; deal worldwide in August was the Qatar Investment Authority’s purchase of an additional 17% stake in Volkswagen, and Qatar Holding’s concurrent purchase of a 10% stake in Porsche. The transactions had a combined ranked value of $9.6 billion, according to Thomson Reuters. As a result of the deal, Porsche will set up research and development and testing facilities in Qatar.

Abu Dhabi’s state-owned investment fund, Advanced Technology Investment Company (ATIC), became a major participant in the global microchip industry on September 7 with its cash purchase of Singapore-based Chartered Semiconductor Manufacturing for $1.8 billion. Chartered’s largest shareholder was Temasek Holdings, an investment company owned by the government of Singapore. ATIC is also the main shareholder in Globalfoundries, a US-based joint venture with Advanced Micro Devices. Globalfoundries and Chartered together will create a manufacturer of next-generation chips that will be big enough to compete with Taiwan’s customized chipmakers, which now control about two-thirds of the global contract chip market. Doug Grose, CEO of Globalfoundries, will run the combined operations with Chartered, which makes chips that run the Microsoft Xbox 360 game consoles. ATIC will assume $3.1 billion in debt and covertible shares of Chartered, which posted a loss of $39 million in the second quarter, its fourth quarterly loss in a row.

On a purely portfolio risk management basis, there are legitimate grounds for asset-rich countries to seek real assets through SWFs, according to State Street. These countries holding large foreign exchange reserves need to avoid the risk that official-sector debtors from the industrialized countries will seek to reduce their nominal liabilities through a policy of inflation, it says.

Top Mergers and Acquisitions in August 2009 THE AMERICAS Date Announced Target Name (Target Advisers) Country Acquirer Name (Acquirer Advisers) Country Description Value ($billion) 8/31/09 BJ Services (Greenhill) (Bank of America Merrill Lynch) US Baker Hughes (Goldman Sachs) US Definitively agreed to acquire provider of oilfield services, in a stock-swap transaction. 5.53 8/31/09 Marvel Entertainment (Bank of America Merrill Lynch) US Walt Disney (Goldman Sachs) (Allen) (Guggen heim) US Agreed to acquire provider of entertainment licensing services, for cash and shares. 3.84 8/10/09 Barnes & Noble College Booksellers (Morgan Stanley) (Citi) US Barnes & Noble (Greenhill) (Wells Fargo Securities) (J.P. Morgan) (Bank of America Merrill Lynch) US Definitively agreed to acquire owner and operator of bookstores. 0.60 8/19/09 Marcellus Shale natural gas field (Bank of America Merrill Lynch) US Enerplus Resources Fund (RBC Capital Markets) Canada Agreed to acquie a 30% stake in oil and gas exploration and production property. 0.41 8/14/09 NCI Building Systems (Greenhill) US Clayton Dubilier & Rice Fund (Sagent Advisors) (J.P. Morgan) US Definitively agreed to acquire preferred shares convertible into an 84.24% interest in manufacturer of custom metal building systems. 0.25 8/11/09 Armstrong Holdings (Bank of America Merrill Lynch) US TPG Capital (Barclays Capital) US Agreed to acquire a 12.2% stake in manufacturer of flooring and other building products and cabinets. 0.16

EUROPE Date Announced Target Name (Target Advisers) Country Acquirer Name (Acquirer Advisers) Country Description Ranked Value ($billion) 8/17/09 Volks- wagen (Citi) (Morgan Stanley) (Goldman Sachs) (UBS Investment Bank) (Deutsche Bank) Germany Qatar Investment Authority (Credit Suisse) Qatar Agreed to raise its staike to 19% by acquiring a 17% stake in Volkswagen from Porsche. Concurrently, Qatar Holding agreed to acquire a 10% stake in Porsche. 9.57 8/27/09 National Express (Morgan Stanley) (Bank of America Merrill Lynch) UK Investor group (Citi) Luxembourg CVC Capital Partners and the Cosmen family planned to launch a tender offer to acquire provider of transportation services, in a leveraged buyout. 3.03 8/12/09 Emerald Energy (Evolution Securities) (Jefferies Internati onal) UK Sinochem Resources UK (Standard Chartered) (Panmure Gordon) (Balloch) UK Unit of Chinese state-owned Sinochem planned to launch a tender offer to acquire oil and gZas company, via a scheme of arrangement. 0.88 8/4/09 Findo-mestic Banca (Banca IMI) Italy BNP Paribas Personal Finance (BNP Paribas) (Credit Suisse) France Agreed to raise its interest to 75% by acquiring a 25% stake in provider of consumer credit services. 0.72 8/18/09 Yamal LNG Russia Novatek Russia Was granted an option to increase its interest to 74.9% by acquiring a 23% stake from Volga Resources. 0.45 8/14/09 Stockmann Oyj Finland HTT Holding Finland Unit of Hartwell Capital acquired a 9.15% stake in owner and operator of department stores. 0.14