Rajeev Gupta, executive vice president, DSP Merrill Lynch
Rajeev Gupta, 44, executive vice-president and joint head of investment banking and mergers & acquisitions (M&As) at DSP Merrill Lynch, needs no introduction in the world of M&As. Armed with a B Tech from the Indian Institute of Technology and an MBA from the Indian Institute of Management, Ahmedabad, he has developed great expertise in the field of finance. After spending about 10 years in the industrial sector, Gupta joined DSP Merrill Lynch to head its corporate finance division. In 1996, he went on to set up the M&A practice for the firm, which he has brought to a leadership position.
The government is planning to go for a public offer before selling to strategic investor, in the case of certain PSUs such as Nalco. Analysts are of the view that this will affect the valuation of these companies. What do you think?
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The ministry of disinvestment has deeply impressed M&A bankers with its perspicacity in devising tailored strategies for the divestment program which it administers. Nalco is a case in point. The decision to sell a part of government's shareholding in the local and ADR markets provides two important advantages. For one, The local & ADR floats would ensure continued listing of Nalco post strategic sale and public offer. As a shareholder who would have a large ownership even after the divestiture to the strategic buyer, the Centre would gain from the continued listing of Nalco, particularly with the expectation that the ultimate buyer would be a strong operator. Also, developers often perceive a local listing to aid risk abatement and so continued listing would enhance strategic value. Secondly, A reduced size of strategic sale would enable a larger number of bidders to participate in the divestment, thereby increasing competition and driving-up strategic valuations.
It is often said that regulatory environment is not conducive to takeovers. Your take?
Takeovers enhance competitiveness. This has been tested in several countries. The best example of this is perhaps the US, which faced severe competitiveness problems and associated macroeconomic issues (such as loss of confidence) in the mid-eighties. The US overcame them, inter alia, by encouraging M&As. The key economic challenge in India is no different; we face low competitiveness in many of our leading industrial sectors. Our solution can not be too different and therefore takeovers must be encouraged.
If we are to bring about increased acquisition activity we need to address some key aspects in our economic regulations and norms. First, the largest Indian financial institutions (FIs), who have large shareholding in most companies and also happen to be government-owned, need to be more active and lead the demand for enhanced returns. It is not that FIs do not demand performance from incumbent managements, they do!
But they tend to be vociferous primarily when investee companies face losses. If on the other hand profitability is below par and shareholder returns remain depressed for an extended period of time, they do not exert pressure for a change of strategy or ownership. This is particularly so when the factors inhibiting returns are seen to be 'external'-- say industry structure related. The solution lies in their getting less forgiving and using the strength of their ownership to seek rapid industrial restructuring through M&A to enhance competitiveness and returns.
Secondly, our indirect taxes are exceedingly unfriendly to corporate restructuring. We have incredibly high rates of stamp taxes on asset transfers consequent to such corporate actions. We levy stamp taxes on asset transfer transactions like mergers which are not taxed in most countries. On income tax we tax share swaps which are not usually tax free in most countries. We have rules which impose sales tax on transfer of intangibles like brands.
Thirdly, our regulatory mechanisms for cross border investments and exits are rigid, and unfriendly to innovative transaction structures. In the same vein restrictions on share transfers to foreign strategic investors (requires board approval) rule out an efficiency pressure point for incumbent managements.
Lastly, debt financing of acquisitions in India is very difficult. Funding rules aimed at preventing marker speculation get applied to takeovers, probably unintentionally, and thus moves that could have imparted efficiency get thwarted.
Are there any issues in takeover code which needs to be addressed to spur corporate action?
I think the Indian takeover code, some micro aspects apart, is heavily tilted towards acquirers. Corporate actions are not being held back because of the code. The constraints are elsewhere as I have outlined above. Nowhere else in the world is the acquirer able to get away with a less than a 100 per cent tender offer. If you think about it this is a great aid for acquirers and indeed many have used it to tremendous advantage.
If I had to suggest changes in the code these would revolve around relaxations on voluntary offers, provisions to make offers dependent on non-statutory events (subject to safeguards) and some less invasive provisions on illiquid share valuations.
Industry experts have been harping that consolidation looks imminent across all sectors but nothing seems to be happening...
I would summarise the longer term factors as no shareholder pressure and unusually high incumbency advantages. The shorter term factors have been the crowding out of private sector deals due to the large disinvestment program of the government.
Which sectors according to you require and / or witness consolidation?
The need is everywhere. Every sector is highly fragmented with negative consequences on profitability and returns. Strangely, one of the drivers of consolidation in India is the presence of conglomerate groups, many of who have turned highly strategic in their outlook. You will find that sectors in which conglomerates don't operate are slowest to consolidate. Pharma is an example of this. But obviously the main driver is how steep the scale economy curve is. We feel that it is especially steep in banking, media technology and cement and these should see action.