New Delhi: The financial crisis has changed the model of investment banking, a change that Ken Costa , chairman, Lazard International, describes as dramatic. On his first visit to India, Costa shared his outlook on mergers and acquisitions (M&A), Lazard’s activities and the economy. Edited excerpts.
M&A activity is down this year (6% through October). What is your outlook for the rest of the year?
(Capital) markets have been in seizure and that is what has driven a lot of the M&A activity. It’s very difficult for the next few months to see what form of M&A activity will take place.
There are however bright spots. For example, Lazard is advising the Tata group on the NTT DoCoMo transaction (of a 26% stake in Tata Tele Services Ltd), which has just been announced. Different forms of M&A are now beginning to emerge. We’re back to a much more cooperative partnership model than the straight takeovers that might have been pushed. This is partly because of the lack of capital. People are having to work out how can we achieve a common objective in a capital restrained world.
Forms of M&A: From straight takeovers, Ken Costa says it is back to a much more cooperative partnership model . Ramesh Pathania / Mint
When do you see new companies raising money from the market? When do you see companies having that confidence?
When the equity markets begin to stabilize. At the moment it’s a falling knife. It’s not that there is a shortage of capital in the market. Many savings institutions are still accumulating regular savings. The savings plans and the insurance products and the savings continue. This is building up in cash. No one is going to be prepared to make major commitments to the equity markets until there is the beginning of seeing that the after-shock has lessened and there is, therefore, the beginning of stability. Markets do look forward. So markets will pick up ahead of the real economy. You’ll have the perverse effect of having serious issues in the real economy and at the same time markets begin to pick up.
Do you see that happening?
That’s happened in almost every one of the cycles. It creates a dislocation; people cant understand, things are so bad because don’t forget we have not yet, in the developed economies, seen the effects of the recession. We’ve seen the effects of a major banking crisis. When that happens then markets will then begin to function again and cash-equities, IPOs, (initial public offerings) raising cash for equity will emerge. But one other trend that will occur in the M&A market is, increasingly, companies will use their paper to effect mergers because the banking market is closed, the IPO market is closed, earnings are being squeezed and the volume and growth is not there.
Bankruptcy-related M&As have been rising. That’s an area that seems to be thriving. Can you give us a sense as to how long that would continue or how well that market’s doing?
The one surprise has been that bankruptcies have been so low outside of the United States. Lazard has one of the leading restructuring practices in the world and we’re beginning to see two things. One, the restructurings that take place because of the tight lending conditions and discussions with the banks and secondly, when these actually have occurred the restructurings that do take the whole company. It is only just beginning to grow in western Europe, we haven’t seen an absolutely major collapse other than in a financial institution which are separate issues than in the industrial or sometimes called the real economy…
And in the US even though it’s been patchy – related very largely to the housing related property.
Do you see bankruptcies spreading to Europe and parts of Asia?
Yes, I think that as the economies get tighter and the recession bites, volumes drop, margins go up, covenants are breached and banks calling for capital to be returned this will continue to grow.
Should companies in India be worried about going under? Or is that not a fear you have for India?
Well it’s not as great a fear because the Indian economy is still growing. This is a hugely important factor for M&A and for India. It may look very bad and of course your stock market has reflected (that). What has happened is that there has been only one liquid market on the world through which the deleveraging could take place – the equity market – and so therefore the massive withdrawal of investment outside the Indian stock market has given the false impression that that was a view of where India is now. There is still relatively strong companies capable of taking advantage of the opportunities.
What are the sectors that Lazard is going to focus for M&A activities, advising your clients. Do you see opportunity in certain sectors?
I think restructuring would be the dominant one. A lot of effort is spent on restructuring work that would definitely be a prime focus of us worldwide. Secondly, the sectors that have been the most hit, for example natural resources, will need to consider consolidation and the consolidation within the financial services businesses will continue. There will be further activities in those areas.
Do you see outsourcing growing? Not just outsourcing call centers but auto components for auto companies, banks like yours sending back office functions to India and so on.
Certainly, but that is a trend that’s already in place.
Do you see that accelerating?
That is likely to accelerate in a very cost conscious environment. In this environment the denominator matters whereas the numerator is what has fueled the previous few years of volume growth.
Are there any regions in which Lazard would like to increase its activities and presence?
We’re a global bank and we have a strong presence in India. We’re delighted to continue to invest here to make sure we capture the benefits of growth that will come in this market. We would hope that the downturn is not as severe here and that the bounce up is earlier and sustained. The critical issue is that we must not export the contraction of our economies to yours.
You don’t see the developed world leading the recovery?
We must in all this underestimate the size and resilience of the U.S. economy. It’s not possible for this new emerging world to lead us out of this particular crisis. I think in future it will be, when we have a much more developed economies in China and India particularly. But definitely a major contributory factor to helping the world economy come out of this sloth would be that the emerging markets continue to grow and therefore when the consumer begins (to buy) there are enough goods at reasonable prices in the U.S. and that we don’t have protectionist barriers.
By all indications you are happy with Lazard’s activities in India. Is there anything you’d like to see the government do for banks like yours? Is there a wish list that you have?
There’s a wish list that all our foreign participants in the banking system have and I’m sure that will be fulfilled in due course in the relaxations of some of the regulations. As far as we’re concerned we’re principally an advisory house giving independent quality advice and if there’s ever been a time when this has been needed is when there are many lending banks with many conflicting interests. That is why people would want to have a bank that is independent and capable of making those independent judgments to help assess the structures of the finances and where where they’re going. So we’re very comfortable with where we are and if anything we’d like to add to it.