Saurabh Agrawal, managing director and head, investment banking, has reason to feel pleased with his team at DSP Merrill Lynch — his firm tops the M&A league table and should secure itself a reasonably good ranking in the debt and equity fund-raising sweepstakes by the time the year draws to a close. Agrawal feels India Inc has learnt its lessons when it comes to overpaying for acquisitions. Excerpts from a conversation with Shobhana Subramanian:
Has DSP Merrill Lynch’s investment banking business leveraged the merger with Bank of America?
Merrill Lynch always wanted to acquire a banking platform to exploit the India opportunity. The merger was announced late last year but it has taken some time for the teams to start functioning as one. Now, the fixed income business which used to reside in DSP Merrill Lynch, has been combined with that of BofA, and has completely changed the way in which we can go out and raise money, the kind of products that we can offer clients such as forex hedging or money market instruments. That gives us more fee income and what makes a big difference is that we can now carry out very large transactions. For instance, in the Bharti-MTN deal, we were writing out a large cheque — we can now go up to $10-15 billion.
Foreigners seem to have a huge appetite for Indian equities?
We’ve done three equity deals in November and, I believe, the first quarter of the new year is going to be a busy one. The difference between equity deals which were being done in June-August and now is that the kind of players that were active in the market then comprised several hedge funds and momentum players. Today, almost three-fourths or even 90 per cent of the issues get sold to long-only funds accounts such as Templeton, Fidelity or Capital, and these are the investors that are the bigger buyers now. While these funds may have been buyers in quality paper earlier too, most of the real estate paper was picked up mainly by hedge funds.
Is it cheaper now to borrow overseas now that Libor has fallen so sharply?
Not after you take into account the swap costs. For instance, AAA paper for a tenure of 3-5 years can go to 8-8.5 per cent in the local market. In the overseas market, it would cost 250-300 basis points over Libor, so after building in the swap costs, there would just be a marginal difference. Also, Libor is a floating rate whereas local banks are offering fixed cost financing that is cheaper. As markets are volatile, hedging costs can turn out to be high.
After a fairly dull 2009, do you see a lot of M&As happening next year?
Both volumes and size of deals will pick up next year and it will largely be driven by cross-border deals. Some of the large Indian firms that did not participate in the acquisition spree between 2004 and 2008 will be more active. There are groups like Bharti, which was looking at MTN, and there is news that Reliance Industries is looking at a buyout. There are companies like Sterlite that are sitting on a large amount of cash and will look forward to doing something big. One also continues to see capital flowing into the country and there are inward acquisitions happening.
Has India Inc learnt from its mistakes in overpaying for acquisitions?
The peer pressure is gone and companies will be more cautious and better-prepared. Also, most acquisitions have been well absorbed by companies. I agree that in India, the system bails you out otherwise there would, no doubt, have been a couple of bankruptcies. But, the bulk of them are working, though we have seen companies bringing down costs like in Jaguar and Land Rover. India Inc has shown it can acquire and run global businesses; back in 2006-07 there was a question mark on its management ability to do so.
But shareholders of many of these companies have been badly hurt. And most mergers, they say, don’t work.
The acquisitions were done with good intent and some — not all — are good assets. And there are instances of companies that have been able to turn around the businesses that they bought. For example, Motherson Sumi had done a reasonably big acquisition of around $300-400 million in Europe which it has turned around. There are sectors, like media for instance, where it doesn’t make sense to do an acquisition and a merger may not always work, but in manufacturing industries where there are forward or backward linkages, it helps. For instance if you are running a power plant, it makes sense to go out and acquire a coal mine. Or you could acquire a distribution network if you are in a consumer business.
How do you see restructuring of companies playing out?
The trend will continue. The 2004-08 period was one of high growth for Indian firms, led by both organic growth as well as acquisitions — there is now a period of consolidation which will extend to 2010. Some of the large groups will exit businesses that are not core to them and some of the merger deals, like Grasim and UltraTech, that have happened were done with the aim of creating a cleaner structure. Let’s not forget that in 2004 our economy was under $300 bn — today we are close to $1.2-1.3 tn. So, for another trebling of growth, some rationalisation is important. It boils down to companies or groups focussing on certain sectors, having leadership and scale.
Is there money to be made in investment banking in India?
This is a very, very price-sensitive market and so, in spite of the volume of business that gets done, the fees are insignificant. We are probably 25 players competing for a pool of what could be about $500 million this year. Next year, the pool should not be significantly different, it would probably be higher by 20-25 per cent, so we’ll see a pool of between $600 to $700 million. The peak year was 2007 when we saw a pool of close to $800 million. What has happened is that most of the equity issuances have been pushed into the local market, they are driven more by Qualified Institutional Placement (QIPs). A QIP, being a relatively simpler product than say a GDR, fetches us a smaller fee of between 1 and 2 per cent depending on the size of the issue, whereas a Global Depository Receipts (GDR) would fetch us between 2 and 3 per cent. So, if in a deal there are six bankers, each one of us is making 15-20 basis points.
Is M&A a good business to be in?
Within M&A, the pure advisory piece doesn’t give us great fees, what makes us money is financing. The total M&A fee pool for 2009 is $50 million and at the peak in 2007 it was around $140 million. Unless a firm offers a suite of services, it’s difficult to survive. Institutional broking brings huge fees and the distribution can be used to do deals. Generally, investment banking, in many franchises, is not profitable and could be a loss leader, but it gives you positioning and branding. What we do is we look at things in a block — in 2007 we made around $140-150 million as investment banking fees as a house, last year we made less. The idea is to have a decent market share — currently our share is around 7 per cent of the total M&A, debt and equity capital markets.
Do you see Indian companies being able to access the kind of money overseas that they did in the last few years?
I think the domestic pool of capital too is growing, and that’s being driven by both mutual funds and insurance companies. Some of the insurance companies are big buyers of equity issues. But we don’t have a big debt market, most of it is driven by bank financing and some amount by mutual funds, which is just two-four years funding. Some amount of rupee financing is available but other than that companies have to look abroad.
