Investment banking on a roll

40% growth in mergers & acquisitions nets Rs 1,755 crore fees.

With mergers and acquisitions topping $26 billion so far in 2006, investment bankers, who charge at least 1.5 per cent of the deal size as fees, have earned upwards of $390 million (Rs 1,755 crore) during the period.

If the trend continues, the bankers will earn far more than the $435 million (Rs 1,957 crore) they are estimated to have made last year from closing M&A deals worth $29 billion.

"The growth is phenomenal. M&As are at least 40 per cent more than last year," said Ernst & Young National Director (transaction advisory services) Jayesh Desai. "Companies are now willing to pay you for services; earlier, they were reluctant," he added.

Desai expects private equity deals to cross $7 billion this year, up sharply from $2 billion last year.

Investment bankers said up to 40 per cent of their earnings now came from overseas acquisitions by Indian companies. A combination of inexpensive money and growing global ambition has sent Indian companies scurrying for opportunities abroad.

"This confidence of Indian companies is fuelled by a conducive foreign atmosphere, easy money to finance deals and the willingness of foreign companies to tie the knot with their Indian peers," said Amit Mukherjee, partner, Ambit Corporate Finance.

He expects the spurt in outbound deals to grow in the years to come as Indian businessmen are now confident of managing overseas assets.

The exponential growth in M&As in India has lured several foreign banks to set up office here. Foreign banks stand to gain doubly from M&A activities, especially from leveraged buyouts.

They undertake investment banking for their clients and also organise funding from the foreign offices where the target firm is based. CSFB, Lehman Brothers, Nomura and Goldman Sachs are setting up offices and many more are waiting. Meanwhile, the established players are enhancing their teams.

Already, there are signs of price cutting, because of the intense competition. An investment banker with a foreign fund said advisory business had become less lucrative. But a bank can still charge some premium if it undertakes the entire process from identifying the target and negotiating the deal to organising funding for it.

With companies like Wockhardt, Mahindra & Mahindra and the Tata group setting up their in-house investment banking divisions, the competition could intensify in the days to come.

The surge in business has also led to a churn in the ranks of investment banks. "There is a 25 per cent churn in mid-management," said Ernst & Young's Desai. The firm has ramped up its M&A team by a quarter in the past year, taking people from other investment banks and private equity funds.