Synergy for Bank Danamon

Synergy for Bank Danamon

Another confidence-building deal is about to be wrapped up in
the banking industry.

The Indonesian Bank Restructuring Agency (IBRA) selected on
Monday afternoon Asia Finance Indonesia Pte. Ltd., the consortium
of Singapore government-owned Temasek Holdings and Deutsche Bank
of Germany, as the preferred bidder for a 51 percent stake in
Bank Danamon.

The foreign consortia predictably edged out the other two
final bidders -- Bhakti Capital-Bank Mega and Bank Artha Graha
consortia. These two national bidders are indeed too tiny
compared to the Singapore-German group on account of all basic
criterion imposed by IBRA.

Bhakti Capital offered only Rp 1,025 (11.5 U.S. cents) a
share, much lower than the Rp 1,160 floor price set by IBRA,
while Artha Graha withdrew from the bid at the eleventh hour.
Asia Finance bid Rp 1,202 or 1.27 times Bank Danamon book value.

Even if the national bidders offered much higher prices, they
could still not match the Temasek-Deutsche Bank consortium in
terms of reputation or credibility that is most vital to a bank
as an institution of trust with high fiduciary responsibility.

Besides generating more than Rp 3 trillion to the state
budget, the deal will provide a new building block for the
restructuring of national banks and will make competition within
the banking industry much healthier.

Bank Danamon, the country's 5th largest bank with about Rp 47
trillion ($5.2 billion) in total assets, is the third
nationalized bank to be sold to new investors after Bank Central
Asia and Bank Niaga.

IBRA indeed is now racing against time in completing the
overall restructuring the country's largest banks that it now
controls under the government-funded massive recapitalization
program in 1999 and 2000.

Unless these banks are released to private investors who are
able to bring in fresh money, better management and, most
important, higher credibility, these banks could be doomed to
failure when the government begins phasing out its blanket
guarantee on bank deposits and claims later this year.

That only five consortia, including two foreign ones, took
part in the preliminary bidding for Bank Danamon and only two of
them made the final bids further shows how uncomfortable foreign
investors are about the investment climate in Indonesia.

The small number of bidders, however, did not decrease the
quality of the final winner. In fact, the Temasek-Deutsche Bank
will bring in strong synergy to Bank Danamon in all areas most
vital to a sound bank such as capital strength, market
reputation, human resources and networking.

This is the right kind of synergy Bank Danamon badly needs to
bolster its market competitiveness in view of the fragile
economic condition and the fierce competition within the banking
industry as most domestic and foreign banks now compete in the
retail market.

It is therefore misguided to assess the strategic sale of the
bank simply from its price. Yet more important is the credibility
and better management that will be brought in by the new majority
owners. A strategic investor with as good reputation as Asia
Finance will jump start Bank Danamon's operational restructuring.

A stronger Bank Danamon not only will increase its share value
but also will benefit the banking industry and the economy as a
whole. That too will enable the government to recoup a greater
portion of its more than Rp 20 trillion investment in the bank as
it can later sell its remaining 48 percent stake at a much higher
value.

This is the most fundamental thing politicians, who like to
whip up narrow-minded nationalistic sentiments, should be fully
aware of.

A successful deal for Bank Danamon will also create a virtuous
circle within the restructuring of the banking industry and a
conducive condition for the forthcoming government divestment of
nationalized Bank Lippo and Bank International Indonesia and
state Bank Mandiri within the next six months.

The deal should also be welcomed as one of the most
transparent and accountable transactions. Different from previous
divestments, the whole process of Bank Danamon's strategic sale
was supervised simultaneously by an independent review team, a
financial adviser and IBRA's internal audit committee.

However, given the legal and political harassment faced by
many foreign investors that had acquired Indonesian assets --
such as the ones undergone by Temasek's acquisition of PT Indosat
late last year -- the government should not take the Bank Danamon
deal for granted.

Even though the House of Representatives had approved the
divestment of Bank Danamon last year, the government should
immediately start an effective communications program to
enlighten all Bank Danamon stakeholders of the great benefits the
new investors will generate for the bank.