Mumbai: Managing director of Kotak Mahindra Capital Co. Ltd, Falguni Nayar has been with Kotak Mahindra Bank Ltd’s investment banking division for a little more than 15 years, beginning 1993. She also set up Kotak’s investment banking business in both the UK and US. In 2001, she was moved back to India as co-head of its investment services and became managing director in 2005.
Recently, her division signed an exclusive alliance with GCA Savvian Group Corp., a medium-sized Japanese bank run by bankers pooled from Goldman Sachs, KPMG, Credit Suisse and Merrill Lynch and Co. Inc., for international mergers and acquisitions (M&A) in the so-called India-Japan corridor.
This is Kotak’s first such alliance after it broke off with Goldman Sachs in 2005. In an interview, Nayar says she is scouting for similar alliances in Australia, Europe and the US as clients prefer independent advisers than suitcase bankers from big firms. Edited excerpts:.
Scouting for tie-ups: Kotak Mahindra Capital’s Falguni Nayar.
How did your alliance with GCA Savvian begin?
Post-Goldman Sachs’ exit in 2005, we knew that we needed foreign partners to execute cross-border mergers and acquisitions. We evaluated many partners. All the large investment banks had a presence in India and doing business with them wouldn’t work. We wanted full commitment.
Only Barclays and Bear Stearns were willing to come to India, and that too, on their own. We had three choices: to align with big investment bankers like Nomura in Japan or with independent M&A advisers or boutique banks with pure M&A business.
One area we could strike a chord between GCA Savvian and Kotak was on ideation for our clients. Like when we went with them to Fujitsu, I did not know what a large factory they had in IT (information technology) business. Also, in Japan, Nicholas Piramal is a pharma player, but they have a large estate business unknown to many overseas clients. Like GCA can bring in knowledge that can satisfy hungry buyers like Adag (Anil Dhirubhai Ambani Group) or Religare in the financial services sector in Japan.
Why GSA after an equity venture with a large bank like Goldman Sachs?
GCA Savvian is quite big and in many quarters they were second or third in Japan’s M&A league table. We did not want to tie up with global banks in Japan. ICICI Bank had tied up with Nomura and broke off later. So, there were concerns when we looked at five-six bigger banks in Japan. Decision-making was slow and we were unsure whether they would put their resources into the alliance. And we did not look for a passive arrangement.
But the majority of the business from India-Japan will originate from Japan.
Yes. But Indian companies will look for technology and pharma companies in Japan. And our partner feels that there will be interest from India to Japan.
Where do you see the deals from Japan?
Telecom has been active and will continue to be. The other sectors could be pharmaceuticals, financial services and auto components. Japanese companies will come for low-cost base, both for production and services. I have heard that Japanese companies may come to India and set up services here as they have serious non-availability of manpower. Health care could be another area. Auto component makers in Japan have gone to Thailand, South Korea, and India could be their next location. An example is Maruti Suzuki and Hyundai Motors. And finally, India is a large consumption market.
And India to Japan?
Indian companies should go to Japan for luxury goods and technology. Unfortunately, there are few Indian luxury goods makers. Another area could be construction companies buying companies for EPC (engineering, procurement and construction) technology.
If you take the last few big-ticket deals both in India and cross-border, Kotak is clearly missing...
Yes. The large big-ticket deals were mostly driven by financing of such deals. There we had a problem. If you look at the Indian targets, we have a reasonable volume. It is not a problem as I see it. It is a transition that we have to achieve. If you look at global firms, they have created a network in many countries and they are leveraging it. So, firms like us that are strong in the domestic market, we have to build a network like them. And we are in the process of building it. And only when that network is fully in place, we can compete on every corridor. I am not saying we will do small deals. Today none of the banks can afford to do very small deals. The fee cut-off deals are emerging and we would like to do billion dollar deals and even less than that.
How are you doing that?
We are trying to form similar alliances across the globe. We need five-six such alliances.
Your preferred countries?
I would shy away from similar alliances in Egypt, but would definitely would like to have a similar tie-up that would generate demand for Indian companies. In Australia, we would like to have a tie-up for metal and mineral companies in India. The US and Europe is another corridor. In Europe, there are a number of bankers who work together through alliances.
Where is the courage in Indian companies to buy businesses (in Japan), while the Japanese economy is slowing and markets are mature? Indian companies are not financially strong either.
I think India has the strength of entrepreneurship and Japanese companies are sitting on loads of cash on their balance sheet. These two will be the key drivers. Also, the world will move towards share-swap acquisitions like the attempted MTN-Reliance Communications (merger). And such deals need a lot of regulatory approvals. But the trend will continue with more companies choosing share-swap deals. Some large deals may happen in that route. In the US, we have seen many stock-swap acquisitions. Intra-country stock swap is already the preferred one.
What about in India?
Because of global volatility, revenues and profits have come down. Interest rates can go up and down, Currencies can go haywire. So, it will be difficult to justify all-cash acquisitions. Up to a billion dollars is different. But I am talking about really large acquisitions... Increasingly there will be preference towards this stock swap because of global conditions where leveraging the balance sheet is out.
In India, many promoters have never faced such a situation. They are under pressure to repay their debt, they have pledged their shares, equity market is dull and it is hard to raise money. How are you bullish in such a scenario?
Japanese currency is strong. Added to that there are growth opportunities in India, and assets are cheap. Japanese companies are not comfortable in China and South Korea.
What are the drivers of M&As in India after the global financial crisis?
Before the global financial crisis, the whole M&A game was driven by market capitalization where Indian companies could raise money from the market and purchase cheaper assets. There is a change in the mindset of Indian promoters.
Some of them who never wanted to sell their business because of rising market capitalization may sell some of their business. Then there are promoters like of Ranbaxy Laboratories and Spice Communication that are sitting with loads of cash and want to buy companies. The other driver is the lack of successors in Indian companies to run it in a highly competitive world.
Will pledging of promoters’ shares be a driver for M&As?
But the Satyam scam can be a deterrent?
Yes. But someone who is willing to take risks will do it. Conditional open offers is the strong way to acquire control of companies because investors are voting with their shares. And all companies are not like Satyam. I am a believer and I wish they will, too. If they can successfully change the management and board, they will do it
Your alliance with Goldman Sachs with equity participation did not work. How does this tie-up work without equity participation?
What this alliance means is that any deal between Indo Japan corridor for both of us will go through this joint venture. And there will be spirited sharing of fees. It works on total loyalty where we will also pitch together for business. GCA also needs India expertise to do deals in India.
What did you learn from Goldman Sachs?
We are a home-grown bank and we learnt global practices from them.
Then why did it break up?
Sometimes Goldman wanted to do deals depending on their fee cut-off. Both Goldman and Kotak wanted dominance in the venture. And two dominant people can’t drive the business. So, either one of them had to exit. Since the investment bank was an integral part of our corporate bank, we decided to buy them out.