Investment banks close a gloomy year as deals dwindle

Investment banks close a gloomy year as deals dwindle
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First Published: Mon, Dec 26 2011. 12 30 AM IST

A woman counts Rs500 notes at a Standard Chartered Bank branch in Mumbai. Bloomberg
A woman counts Rs500 notes at a Standard Chartered Bank branch in Mumbai. Bloomberg
Updated: Tue, Dec 27 2011. 12 51 AM IST
Mumbai: Investment bankers had been optimistic last year about their prospects for 2011. As the year draws to a close, it’s evident the optimism couldn’t have been more misplaced, and bankers are keeping fingers crossed for 2012.
The revenue of investment banks in India has declined to $515 million in 2011, down 30% from the $741 million generated last year, according to data from Dealogic Holdings Plc., a UK-based research organization that tracks deals.
A woman counts Rs500 notes at a Standard Chartered Bank branch in Mumbai. Bloomberg
Equity capital market transactions slumped 67.26% to $9.76 billion this year and debt capital market volume fell 13% to $39.48 billion.
Mergers and acquisitions (M&As) have dropped to $43.9 billion year-to-date, a 28% decrease from the record $60.7 billion announced in the same period of 2010.
Capital and credit markets have not been as good as last year, especially in the second half, on account of high volatility, said Sughosh Moharikar, head of M&As at Deutsche Equities India.
This year, Deutsche closed one transaction and ranked 16, compared to 36 last year, according to the Bloomberg league tables.
“Dialogues, admittedly somewhat muted than a year ago, will continue to take place,” Moharikar said. “We don’t know for sure how the macro-economic factors will play out and hence in the absence of that visibility, it is difficult to predict how many big deals will close out next year.”
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Topsy Mathew, MD and head of M&As at Standard Chartered India says while there is uncertainty in both the domestic and outbound markets,the coming year will see a fair amount of inbound interest.
The Bombay Stock Exchange’s benchmark Sensex has lost 23.26% this year, when foreign investors sold half a billion dollars worth of Indian shares, and the rupee has fallen 17% since July.
Economic growth is forecast by the government to slow to a pace of 7.5-7.75% from earlier projections of 9%.
The euro zone debt crisis and US economic woes have also cast their shadow on the country.
“There is a fair amount of uncertainty in both the domestic and outbound market,” said Topsy Mathew, managing director and head of M&As at Standard Chartered Bank’s India unit.
Mathew added: “We are still seeing fair amount of inbound interest riding on the India growth story—the option of not being here does not exist.”
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Probir Rao, MD, Investment Banking and capital markets at Jefferies India says the global economic conditions muted outbound acquisitions but there is scope for the equities market to improve in the coming year.
Domestic M&A volume stands at $13.8 billion this year, down significantly from the record $45.9 billon announced in 2010, Dealogic data shows.
This is also the lowest level since 2005, when domestic deal volume was $12 billion. Inbound M&A volume has reached $30 billion, slightly behind the record volume of $34 billion announced in 2007.
“Some of the deals were affected due to more rigorous diligence sought by the investor. With the evolving macro and micro economic issues, performance has tended to deviate from projections provided by the company at the start of the deal,” said Sailesh Rao, partner-transaction advisory services, Ernst & Young Pvt. Ltd.
Rao says M&A deals are now taking longer to conclude because of the time taken for due diligence by investors.
According to data from Bloomberg, the average deal size has shrunk from $6.2 million to $4.05 million.
While not many bulge-bracket deals have taken place this year, mid-size investment banks have announced a large number of transactions.
Avendus Capital Pvt. Ltd and o3 Advisory Pvt. Ltd, which were ranked 38 and 23 by Bloomberg last year, have moved up to the 5th and the 22nd spots, respectively, this year.
“Bulge bracket i-banks have fee threshold that they cannot go below and do not do domestic deals,” said K.Ramakrishnan, executive director and head-investment banking, Spark Capital Advisors (India) Pvt. Ltd. “Hence they have not been able to clock good revenues. Additionally, outbound deals, their forte, have not been prolific.”
Outbound deal volume has shrunk to $10 billion this year, a 61% drop compared to last year.
An underlying growth story about mid-cap companies that are growing at 20-40% is attracting a lot of interest, said Ranu Vohra, managing director and chief executive officer of Avendus Capital.
The target sectors include consumer goods makers, pharmaceutical firms, education and the industrials segment.
“We don’t know how the last two quarters of next year are going to pan out although we are bullish about the period till June,” said Deepesh Garg, managing director, o3 Capital.
Foreign investment banks that had set up shop on an optimistic note in the past couple of years have started to lay off people in India.
For instance, Nomura Financial Advisory Services India Pvt. Ltd, which had hired its senior team for investment banking only in the middle of last year, asked at least three senior people last month to leave.
Barclays Capital, the investment banking arm of Barclays Bank Plc., which was looking to set up an equities team at the beginning of the year, realigned its India business, reducing the strength of its investment banking team.
Other investment banks that have laid off people include Daiwa Capital Markets India Pvt. Ltd, Bank of America-Merrill Lynch and BNP Paribas SA.
Bonuses at Indian investment banks, including Kotak Mahindra Capital Co. Ltd and JM Financial Consultants Pvt. Ltd, have taken a hit this year. Since the mainstay of the old Indian investment banks is equity capital markets, the outlook for 2012 does not appear to be positive.
While it is uncertain how 2012 will pan out for the global and Indian economy, bankers expect the deadlock in deal making to ease next year.
“The desperation of promoters to raise capital will peak next year and we expect the deals to get executed at more rational valuations,” Rao of E&Y said.
harini.s@livemint.com
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First Published: Mon, Dec 26 2011. 12 30 AM IST