Consolidation in Taiwan's financial services sector has reached a critical stage, boosting the government's chances of hitting targets in a second phase of sector reform. Taishin Financial Holding's purchase of a stake in Chang Hwa Commercial Bank on Friday was the second major banking deal in as many weeks. Just one week earlier, regulators gave their approval for the United States' GE Capital to take a controlling stake in Cosmos Bank, paving the way for the first foreign takeover of a Taiwan bank. At NT$36.6 billion ($8.9 billion), the Taishin deal is about three times the size of the GE-Cosmos deal. But size aside, the two deals look very similar. Both purchases involve the injections of new funds into the acquisition target. Taishin was the winning bidder for 1.4 billion mandatory convertible preference shares that would convert into an equivalent number of common shares upon expiry in 2008, with equal voting rights. The winning bid translates into a price of NT$26.12 per share, 42 per cent higher than the NT$18.35 closing price of Chang Hwa shares the day before the deal. Even with a 1.8 per cent coupon thrown in, the price might be considered high. Chang Hwa gets NT$36 billion in cash from the sale to boost its balance sheet. The firm last year posted a 10 per cent fall in operating income, which was down 36 per cent from 2001 but analysts regard it as reasonably sound. What Taishin gets is the title of Taiwan's second-largest banking group by assets and the largest by branch numbers. Taishin chairman Thomas Wu has been very public about the bank's desire to expand through mergers and acquisitions, having been in talks with Sinopac and First Financial. Ironically, Chang Hwa was believed to be competing with Taishin for a merger with Sinopac. In the Cosmos deal, the injection of around NT$12 billion in cash from GE's purchase of a minority stake is considered more urgent. Cosmos makes money from cashcards and not much else. The aspect common to the two deals is that, while both acquiring companies are buying minority stakes, they will be gaining de-facto control. Taishin will own 22.5 per cent of Chang Hwa, making it the largest individual shareholder, and is expected to be given the chance to buy the 18 per cent stake held by the Ministry of Finance. Taishin will get two Chang Hwa board seats ceded by the Ministry of Finance, a clear indication of the government's desire to hand the bank over to the private sector and move toward its reform goals. Phase I of the reform agenda was to cut non-performing loans to less than 5 per cent, which has been done. Phase II goals include cutting the number of government banks by half, and putting at least one local bank in foreign hands. 'A government bank is a government bank. Even if the government owns just 20 or 30 per cent of a bank, they will have absolute rights,' Mr Wu told foreign reporters in March. GE's stake in Cosmos is less than 50 per cent but it will gain management and board control.