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Topsy Mathew | Dilution of equity is the last option for Indian promoters

Topsy Mathew | Dilution of equity is the last option for Indian promoters
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First Published: Mon, Feb 21 2011. 10 10 PM IST

Voicing concern: Mathew says the volatility in the equity markets, if prolonged, can hamper capital raising and growth plans of companies.
Voicing concern: Mathew says the volatility in the equity markets, if prolonged, can hamper capital raising and growth plans of companies.
Updated: Mon, Feb 21 2011. 10 10 PM IST
Mumbai: Topsy Mathew, managing director of mergers and acquisitions (M&As) at the Indian unit of Standard Chartered Plc, helped the UK-based bank climb 12 positions to number three last year in deals in the South Asian nation, beating Goldman Sachs Group Inc., the largest global takeover adviser. The 35-year-old Mathew advised Bharti Airtel Ltd on its $10.7 billion purchase of Zain Telecom’s African mobile telephony assets, the second-biggest overseas acquisition by an Indian company.
Standard Chartered advised a consortium led by iGate Corp. to acquire Patni Computers Systems Ltd for $1.2 billion last month.Mathew spoke in an interview about the prospects for 2011 after the nation witnessed the busiest year for takeovers in 2010 with more than $71 billion worth of transactions. Edited excerpts:
Investment bankers are again busy. How active is Standard Chartered?
Voicing concern: Mathew says the volatility in the equity markets, if prolonged, can hamper capital raising and growth plans of companies.
We are well past the difficult days of 2008 and 2009. In 2010, we saw fairly robust business, both in terms of mergers and acquisitions as well as the equity markets. We have seen a little bit of tightening in liquidity, both in terms of foreign institutional investor flows and leverage availability from early this year, which might be having some impact. The volatility in the equity markets, if prolonged, can hamper capital raising and, hence, growth plans of companies. But does that stop groups from strategic conversations from happening? Absolutely not. There are some sectors where regulations are pending like telecom, where the change in M&A guidelines that are expected in next 60-70 days will give fresh impetus to the activity.
Which sectors can one watch for action?
We are still seeing a lot of discussions in oil and gas, power, metals and mining assets—the fundamental need for resources to fuel economic growth is changing and those are long-term propositions. Unless the environment and related sentiment corrects substantially from where it is today we see large players engaging in transactions. In some cases, like the telecom industry, dynamics will be driving M&A activity.
Investment banking, unlike in the past, is now driven by client needs, as seen from what happened during 2008-09. How did you help you clients during the crisis?
I think our value proposition to clients during 2008-09 is fairly well known in the market. We were very much open for business then. We worked on several large transactions during the thick of the crisis. A very good example is that of the HCL-Axon deal that happened in September-December 2008. It was a large cross-border transaction, and we supported them and it got done. There are several large groups that we worked with during that time which resulted in enhanced relationships. For us, these are home markets, where supporting clients during challenging times is what truly tests our relationship.
Some of your rivals have changed strategies to be pure investment banks. What is your DNA?
Our DNA is (that of) a commercial bank. We look at supporting our clients using various products. It might be transactional banking at one end to general corporate lending at the other. Investment banking products on mergers and acquisitions and capital market are just a part of the whole C-suite banking offering we have. Within this, the business mix is fairly balanced, making for a more resilient business.
We are seeing some signs of the return of leveraged buyouts since the credit crisis started in 2007. Is it a blip?
As a matter of principle, large companies in India have very strong balance sheets and, therefore, when they need support in making an acquisition, we go on the merit of that. Unlike in the past, promoters tend to be comfortable with managing their companies with lower stake.
Does this reflect their ambition to grow at the expense of equity?
For promoters in India, dilution of equity is the last option. They would try to optimize at various levels before they think of equity dilution. We have seen two kinds of change in the mindset of promoters running family businesses in India. One is where the large promoters are looking at growing and scaling their business substantially by order of magnitude and have got comfortable with leverage as a means of achieving their goals, being mindful of the potential for upside in their business and, hence, wanting to maintain higher stakes.
Second, on the inbound side, transactions are largely driven by attractive valuations. If someone makes a significant value proposition on the table that is attractive enough for the family or the group, there will be more conversations today. There are more examples of it today as compared to a decade back. The market has evolved; today people are willing to engage in a dialogue. Majority of them will continue to say no, but then they are willing to hear you out. Promoters are also connected with the global economy to understand some of these businesses and to take it to the next level because of the really different set of skills and R&D capabilities.
What will be drivers for inbound M&A?
India is a “must-have” geography today. If in the 1990s, people were still not thinking of India as a preferred destination to do business, it has become a “must-have” in the last few years.
Chinese government-owned companies are on the prowl for mineral resources. Do you see some sparks among our public sector companies (PSUs)?
The resource needs of the country need to be addressed by some of the PSU companies and, therefore, it is among the more obvious plays. Having said that, it has been slow progress.
Is financing acquisitions getting tougher?
Outbound is straightforward and fairly well tested. In the case of inbound as well, MNCs (multinational companies) have easy access to capital. But the problem is for domestic mergers and acquisitions, as the Reserve Bank of India does not allow acquisition finance in India. Non-bank routes are expensive and not available in size. Until now we have seen companies buying other companies mainly through internal accruals of cash-rich companies or through equity-swap arrangements. Hence, the financing options are limited. So if a party wanted to consolidate first before it went and did something in the overseas markets, it would be difficult. So if you give him a choice of diluting in India or to borrow to buy assets overseas, what will he choose? In a different setting, let’s say there is an asset that an Indian company as well as a foreign company is looking at buying in India. The foreign company has full access to capital overseas as against the Indian one. So, this is a huge impediment and an unfair playing ground.
baiju.k@livemint.com
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First Published: Mon, Feb 21 2011. 10 10 PM IST