Take a good look at the three personalities on the cover of this magazine. Chances are you've seen them before (but never together). Chances are you'll see them again. And again. In the days, months, and years to come (but not together, for sure). Take Manisha Girotra, Chairperson & Managing Director-India, UBS, the lady who's seated in the forefront. The India head of the Swiss investment bank is a familiar face on Deal Street, but over the past six months she's become a veritable household name in the country. Reason? She's been at the helm of three billion-dollar merger & acquisition (M&A) deals-doubtless a feat of unimaginable proportions, considering billon-dollar transactions themselves are pretty much a novelty on the Indian deal-making landscape. It may also be a feat because here's a woman closing super-size deals in an industry that's globally perceived to be testosterone-driven.
Now take a look at the two gentlemen with Girotra. They're both dyed-in-the-wool bankers who've been around seemingly for ever, and who've been steady companions of the Indian capital market right from its fledgling days. Today, they're older, wiser-and very rich. In 2005, Hemendra Kothari, 61, Chairman, DSP Merrill Lynch, made the killing of his life when he sold 50 per cent of the 60 per cent he owned in the investment bank to his Wall Street partner for a cool Rs 2,250 crore. But Kothari hasn't taken the money and run to the Bahamas or some such place. Rather, he's still calling the shots at the firm, and has been anointed Vice Chairman of Merrill Lynch International, to boot. In the recent past, DSP Merrill Lynch has pulled off big m&a deals like Flextronics and Kohlberg Kravis Roberts (KKR) and Holcim and Gujarat Ambuja, and played a pivotal role in helping mega-corporations like ICICI Bank and DLF raise capital from Dalal Street. For its efforts, Kothari's firm has collected a little over $46 million in fees so far in 2007.
Nimesh Kampani, 60, Chairman, JM Financial, is another street veteran who's been there, done deals, and is still hungering for more. A recent split with Wall Street partner Morgan Stanley might have left him up the I-banking creek without a paddle, but he's got a handy life-jacket worth Rs 2,000 crore, courtesy that sell-out. On his own Kampani is now leveraging his decades-old relationships with the who's who of corporate India; and along with an ideas-churning team that's stuck with him through more of thick than thin, and his newly-acquired net worth, he's ready to play advisor-and partner-to an India Incorporated that's hungry, and willing to pay top dollar, for global assets.
|THE TOP 10|
How fees of India's I-bankers stack up since 2004 ($ million)
|DSP Merrill Lynch|
|DSP Merrill Lynch|
|JM Morgan Stanley|
|JM Morgan Stanley|
|Deutsche Bank AG|
till June 2007
|JM Morgan Stanley|
|DSP Merrill Lynch|
|DSP Merrill Lynch|
|Deutsche Bank AG|
|Deutsche Bank AG|
|Note: Source for all data is Thomson Financial. |
Figures include fees for M&A, IPOs and follow-ons, debt & convertibles and loans. Fees are for deal announced and not necessarily completed. Kotak and Goldman were partners till 2005 and JM Financial and Morgan Stanley were partners till 2006.
But this isn't another story on corporate India's insatiable desire to go global. Instead, it's about the role Indian investment banks are playing in this global march, in helping corporate India achieve size and scale, and also in helping them raise billions to satisfy their urge to be Indian multinationals. And it's a story on how Indian I-banks and the deal-makers at their helm are getting richer and richer in the process. Consider: The $109.2 million, or Rs 436.8 crore, that UBS India earned in fees in the first six months of 2007 would be adequate for the Swiss investment banking giant's domestic operations to buy chunky controlling stakes in mid-cap companies like Goldiam International and Maharashtra Scooters. And if the entire Indian investment banking industry were to get together, the $929 million they grossed till June by cutting 977 deals would be good enough to allow them to buy out 54 per cent of Reliance Industries-controlled IPCL, or pick up a 51 per cent stake in a company like Sesa Goa.
Chairman/ JM Financial
Chairperson & Managing Director-India/ UBS
Chairman/ DSP Merrill Lynch
CEO-India & Area Head Bangladesh, Nepal & Sri Lanka/ Citi
If the fees are bulging, it's because deal-sizes are expanding. For instance, over the past six months Aditya Birla group company Hindalco snapped up Novelis of us for $6 billion, Essar Global purchased Canadian steel maker Algoma Steel for $1.58 billion, Suzlon Energy bought repower for m1.35 billion and the UB Group took over Scotch maker Whyte & Mackay for $1.18 billion. UBS was an advisor to nine M&A transactions, including Hindalco-Novelis, Algoma Steel and Whyte & Mackay, enabling it to earn close to $100 million in the process, and grab 18.3 per cent of the fees pie. Says Sanjay Nayar, CEO-India & Area head Bangladesh, Nepal and Sri Lanka, Citibank: "Availability of capital-both private and public-at a cheaper cost and the thesis that Indians can run companies better, cheaper and faster can explain India Inc.'s global march."
Here's the money
Advice is welcome, but ready cash opens many doors.
Successful bankers these days are those that are also able to show the money. In a bid to win mandates in a crowded market, a number of investment banks are willing to risk their balance sheets by putting cash on the table. For instance, recently Goldman Sachs, which was responsible for managing the sale of shares of ICICI Bank's follow-on offering in the local and global markets, was also one of the investors in the issue. Similarly, DSP Merrill Lynch Capital Market lent funds to DLF, and also was the global co-ordinator & book running lead manager in its initial public offering. As on 31 March 2007, the loan was worth Rs 279 crore. Market grapevine also has it that JM Financial had written cheques in the issues of Cairn India and House of Pearl Fashions.
Says Frank Hancock, Managing Director, ABN AMRO Asia Corporate Finance: "With competition intensifying in capital market and M&A activities, I expect to see bankers increasingly investing their own money to improve their overall returns from transactions." Adds Sanjay Nayar, CEO India & Area Head Bangladesh, Nepal & Sri Lanka, Citi: "Financing will become critical, and going forward investment bankers in addition to providing good advice that can bring in their own capital and arrange finance from hedge funds or private equity or institutions will be able to add more value." Citibank, through its venture capital firm, Citibank Venture Capital (CVC) has been picking up stakes in listed and unlisted companies. Recently CVC picked up 20 per cent in broking firm Anand Rathi Securities. It also has stakes in listed companies like YES Bank, Centurion Bank of Punjab and GMR Infrastructure.
Says Vedika Bhandarkar, Managing Director & Head of Investment Banking, JP Morgan: "More than the ability to write a cheque, arranging finance will become important. With more hedge funds and private equity players coming into the market we are seeing a change in capital raising activity with companies going in for private market." For instance, Carlyle recently bought a 5.6 per cent stake in HDFC, thereby helping the housing finance company save time and avoid the cost and hassle of raising capital from the market.
That may be precisely the reason for JM Financial starting a private equity fund. "With our net worth of Rs 2,000 crore, we will be in a position to finance small deals, which will be critical in acquiring business in the future," says Nimesh Kampani, Chairman, JM Financial. Clearly, advise is precious, but nothing it would appear is more valuable than ready cash itself.
Managing Director & Head of Investment Banking/ JP Morgan India
If the likes of UBS and Citi-which is second to UBS in fees earned in 2007, with $70 million-are hogging the M&a show, it's because they're players with a global platform, whose consolidated balance sheets can be leveraged during a buyout. For instance, in the Hindalco-Novelis deal, UBS (along with ANN AMRO & Bank of America) threw the Birla company a $2.8 billion debt lifeline. "With companies doing global M&A, financing becomes as important as advice," says Sardana. Pure investment banks like JM Financial for their part stress the value of advice, along with decades of relationship-building. Says Kampani: "New ideas are critical. As are relationships. The two, along with the ability to finance deals, make a perfect combination." Yet, leveraged buyouts are slowly but surely gaining ground, with I-bankers earning in fees $13.80 million from nine such deals in 2007 so far. The advantage of such buyouts: Debt can be less costly than servicing equity even as it provides tax breaks.
MD/ABN AMRO Asia Corp. Finance
Vice Chairman & Managing Director/ Kotak Mahindra Bank
YES Bank is just one of the newer I-banking players threatening the hegemony of the traditional giants. ABN AMRO and Standard Chartered are other commercial banks that have muscled their way into the Indian markets. Alongside, the Wall Street firms are also making their moves. Goldman Sachs, for instance, after breaking away from Kotak, is on the prowl; it earned close to $45 million in fees in the first half. Morgan Stanley, too, is gearing to get its act together after splitting with JM. Credit Suisse and Lehman Brothers are also in the fray. "We have a global platform and a team of global and local expertise, which will help both our local and global clients," L. Brooks Entwistle, Managing Director & CEO, Goldman Sachs (India), told Business Today recently. Adds Uday Kotak, Vice Chairman & Managing Director, Kotak Mahindra Bank: "Investment banking has become more institutionalised. From mom & pop single-person shops, you now have teams of more professional entrepreneurs."
Laughing all the way from the bank
There's a pot of gold at the end of every deal-or at least those that are cut.
A leading Mumbai-based investment bank ended the FY 2007 with revenues of Rs 250 crore, which incidentally are two and half times the previous year's top line. A tenth of those revenues, or Rs 25 crore, accrued as fees from one M&A transaction. The banker at the Executive Director level responsible for that deal took home a bonus of Rs 2.5 crore for that deal alone, based on his 10 per cent contribution to total revenues. Assuming this banker was at the helm of 4-5 other deals (albeit smaller ones), his take-home via just bonuses would tot up to at least Rs 5 crore. And then there are the salaries, which at a large-size investment bank start at Rs 10-15 lakh at the associate levels, nudge up to Rs 40-45 lakh at the Vice President level and go up to Rs 70-75 lakh at the ED level. Annual bonuses would be in line with the firm's growth, which would mean an average of 250 per cent. Says S. Ramesh, COO, Kotak Mahindra Capital Company: "The going has been good and we expect the bonuses to be in the range of 100-300 per cent of the annual salary this year."
At some banks, it isn't quite that clear-cut. "Factors like the year end P&L of the company and country-wise performance determines salary and bonuses of an individual," says Manisha Girotra, Chairperson & MD-India, UBS. "With the going being good in India, this year too bonuses will be lucrative, but there are times when despite decent performances, we in India haven't received any bonus. Everything is not judged on success, failing to clinch a deal also affects one's performance."
The spoils are broadly shared between two teams. One is the originator group, which is responsible for delivering new ideas to clients, and the other is the execution group, which has to conclude the deal. Ideas clearly matter more, which may explain why the group conceiving those ideas takes home a chunk of the booty. However, as Ramesh points out: "Usually the amount is shared equally, but can be disproportionate depending on the nature of the deal."
There's plenty of business going around, but there's also plenty of competition, given the number of players in the fray, right from the big commercial banks to smaller boutique firms. What this means is that promoters have little choice but to dish out more in terms of incentives, and retention bonuses. Investment banking is after all a people's business.
|L. Brooks Entwistle|
Managing Director & CEO/ Goldman Sachs (India)
There's little doubt that India is witnessing an M&A and capital raising spree-with both dovetailing into each other pretty spectacularly-on a scale that's unprecedented. But the question that needs to be asked is whether there's space for all players-global I-banks, global commercial banks, Indian I-banks, and boutique firms, both global and Indian. "With the market being good, there is sufficient business for everyone," says Bhandarkar. Adds Prahlad Shantigram, Managing Director-Corporate Finance & Advisory, Standard Chartered Bank. "When there is a period of supernatural growth, there is ample room for lot many players to participate. The challenge is when there is a slowdown or a de-growth. And I would not rule it out. There are possibilities of a slowdown."
COO/Kotak Mahindra Capital Company
Already, there are signs of pressure in the market. Says Frank Hancock, Managing Director, ABN AMRO Asia Corporate Finance: "The arrival of so many new entrants has intensified competition in the fee market, with new players resorting to baiting and switching."
The new players initially acquire deals by bidding at suicidal rates and then change the terms later. In such a situation, says Citi's Nayar: "Dominance becomes the key differentiator." It won't be long before the market gets segmentised with players focusing on what they do best; in fact, that's already beginning to happen.
But as Nayar adds: "If you have to service the top-tier segment of this country, arranging finance will become critical. Anyone who brings in a combination of solution with optimal cost and right financing will score over his counterparts." However, ultimately it all boils down to the idea, and the ability to provide value that extends beyond commoditised services.
As Kothari puts it: "If India Inc. wants quality advice they will have to pay more."