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Oversea-Chinese Banking Corp. Limited – Hong Kong Will Have to Wait

Ser Jing - Checking in on OCBC's First Quarter Results (pic)

Oversea-Chinese Banking Corp. Limited (SGX: O39) has requested for a lift of the trading halt that was put in place at 10:30am yesterday. At a price of S$9.83 per share, it was sitting on an intra-day loss of 1.5% on Monday.

As of 9:15am today, it’s dropped further to S$9.74 despite the broader market, represented by the Straits Times Index (SGX: ^STI), being flat at 3,124 points.

Yesterday evening, prior to its request for the lifting of its trading halt, OCBC released a statement about a potential acquisition of the Hong Kong-based Wing Hang Bank, which had already been reported by a number of newswires late last week.

It seems that the market’s feeling jittery about the acquisition judging from the share price reactions.

Based on OCBC’s statement, what’s happening so far is that the bank is now in an “exclusivity agreement” with substantial shareholders of Wing Hang, and  both parties – OCBC and Wing Hang’s substantial shareholders – have until 31 Jan 2014 to hash out and finalise terms for a full takeover of Wing Hang by OCBC.

There’s no “binding agreement” of any sorts with regard to the potential-deal, and if both buyer and seller can come to an agreement on the terms of the takeover, it would still be subjected to regulatory approvals from the Monetary Authority of Singapore and the Hong Kong Monetary Authority.

According to Bloomberg News, OCBC had reportedly sent in a bid “less than the two times book value Wing Hang was seeking”, which might cause discussions between the two banks to hit a snag.

Wing Hang’s financials does have its merits, especially with its much better asset quality as compared to OCBC. But like I mentioned yesterday, if the deal’s going through at two times book value – especially when OCBC’s only valued at around 1.5 times book value – “Wing Hang Bank would certainly need to clear a tall hurdle to justify such a high valuation”

The Financial Times also waded into the discussions, writing that Wing Hang “is no bargain”, when its valuation of 1.7 times book value (based on current market prices) is compared against “a pedestrian return on equity of less than 10 percent.”

In the same article, the financial publication also gave an interesting facet to the deal. The Financial Times said that OCBC’s potential-takeover of Wing Hang “looks like a case of two banks, stranded by a receding tide, clinging together” when the US Federal Reserve starts its tapering activities this month, which would lower the availability of cheap money around the world.

But as it is, nothing’s definitive and even if there’s a deal, it might yet turn out a winner for OCBC depending on the price it’s paying for Wing Hang. In acquisitions, as well as in investing, it’s important to keep these wise words from investor Howard Marks in mind:

It has been demonstrated time and time again that no asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough.”

In other words, it all hinges on the price.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.