by Calculated Risk on 7/28/2008 07:33:00 PM

As part of Merrill's major announcement today, Merrill is offering "new common shares with gross proceeds of approximately $8.5 billion."

When Merrill sold stock last December (at $48 per share), Merrill offered to compensate Temasek Holdings if Merrill sold additional stock, at a lower price, within one year.

From the Merrill announcement today:

Merrill Lynch plans to raise $8.5 billion through the public offering of common stock announced today ... Temasek Holdings, Merrill Lynch’s largest shareholder, has committed to purchase $3.4 billion of common stock in the offering ...

In satisfaction of Merrill Lynch’s obligations under the reset provisions contained in the investment agreement with Temasek Holdings, Merrill Lynch has agreed to pay Temasek $2.5 billion, 100% of which Temasek has contractually agreed to invest in the offering at the public offering price without any future reset protection.

Basically the $2.5 billion is a reset on the previous purchase price (dilution without additional capital). Here is the Merrill SEC filing from last December:

If Company sells or agrees to sell any common stock (or equity securities convertible into common stock) within one year of closing at a purchase, conversion or reference price per share less than $48, then the Company must make a payment to Purchaser to compensate Purchaser for the aggregate excess amount per share paid by Purchaser. At the Company’s option, the Company may issue additional shares of common stock in lieu of cash to Purchaser with a market value equal to such excess amount.

Merrill should have been highly motivated to avoid paying this price protection penalty, and this shows a certain desperation - although the good news is there is no future reset protection for Temasek.