The Stampede To Finance Indonesia Inc.

Privatizations have thrown Wall Street firms into close combat

It was one of the biggest splashes in Jakarta's financial circles in some time. This January, Merrill Lynch & Co. opened a 9,000-square-foot office in the glitzy, 32-story tower that houses the new Jakarta Stock Exchange. Curiously, though, the expensive office space had remained empty for a year while Merrill's bankers worked out of the Grand Hyatt Jakarta. Merrill says its staff was too busy with two big privatization deals to move earlier. But sources say Merrill had another motivation for delaying. The firm was initially unsure whether to make a big commitment to Indonesia and wanted to keep its options open. Yet it wanted to appear more committed than competitors, especially archrival Morgan Stanley & Co., which didn't have an office in town. Thus, in a country where perception is almost as important as reality, Merrill signed up for the high-visibility space with great fanfare but really waited a year before it took the plunge and actually opened its office.

Welcome to one of the fiercest battlegrounds in the world for investment banks. Since 1994, Jakarta has been jammed with bankers scrambling for some of the largest government privatizations in Asia. With state-owned companies such as Krakatau Steel and Bank Negara Indonesia ready to go public in 1996 and 40 more to follow, hundreds of millions of dollars in fees are at stake. "There will be lots of money made this year," says Mitchell Shivers, president-director of Merrill Lynch Indonesia.

TELECOM FIASCO. By many measures, Merrill Lynch is leading the herd of Wall Street firms thundering into Indonesia. Merrill earned about $17 million in fees for the initial public offerings of two Indonesian telecommunications firms in 1994 and 1995. It owns 80% of Merrill Lynch Indonesia; the rest is held by a company whose controlling shareholder is Hashim Djojohadikusumo, the brother-in-law of President Suharto's second-eldest daughter. In Indonesia, doing business with Suharto's relatives is obligatory, since the ruling family has the final say on major business deals.

Merrill, though, is still blamed by some for the PT Telkom fiasco in 1995. Merrill and three other banks--Goldman Sachs, S.G. Warburg, and Lehman Brothers--won the Telkom deal by forming a consortium of "global coordinators" who told the government that Telkom could raise over $3 billion. Merrill took the juiciest plum in the complex IPO, an issue of American Depository Receipts listed on the New York Stock Exchange, while the other banks worked on tranches on the London and Jakarta stock exchanges.

But a lack of coordination among the underwriters and meager investor interest forced the government to slash the deal almost in half, raising only $1.7 billion. "It was obviously a deal that was overburdened by leadership," says Jack Wadsworth, who heads Morgan Stanley's Asian business. The shares soared 60% in the first three months, making Finance Ministry officials realize they had left too much on the table for investors. And seven Finance Ministry officials were sacked for the IPO's problems.

RUMOR-MONGERING. Merrill is still the investment bank to beat, even replacing Morgan Stanley as financial adviser to Telkom. But Morgan Stanley remains hot on Merrill's heels. Morgan's lawyers are working feverishly to finish a joint venture with a holding company controlled by Suharto's eldest daughter, Siti Hardiyanti Rukmana. It is scheduled to open in 1996. Morgan will own 50%, Tridan will own 20%, and the rest will be held by the Indonesian brokerage PT Makindo. And Morgan's standing also benefited because the firm did not underwrite the Telkom deal. It had insisted on being the sole lead underwriter and correctly told the government that the issue should be kept small. Morgan lost on both counts and settled for a secondary role as financial adviser. But, says Wadsworth, "in hindsight, we got the first prize."

U.S. firms are also squabbling with British bankers, which have been minor players--even though they arrived in the country in the late 1980s. Indonesians favor American bankers because of their access to the rich U.S. capital markets. In retaliation, some British investment bankers have been spreading unsubstantiated rumors of American slush funds that are used for bribing government officials.

Alleged bribery aside, mixing business with politics could become a problem for U.S. investment banks. Suharto, who has ruled since the 1960s, is 74. His death could undermine deals linked to his family. But that is probably years away. With glittering fees up for grabs, the U.S. firms are willing to take that chance.

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