Mumbai: UK-based Standard Chartered Plc. came forward with a $5 billion (Rs23,350 crore) loan to fund Bharti Airtel Ltd’s purchase of Zain Africa BV, though rival banks stayed away. It also funded Vedanta Resources Plc’s acquisition of a majority stake in Cairn India Ltd to the tune of $5 billion. Prahlad Shantigram, 44, global head of mergers and acquisitions advisory at Standard Chartered, spoke in an interview about how the lender is preparing to deal with the changing landscape of investment banking in India after it advised on some of the largest acquisitions this year including Bharti Airtel’s purchase of Kuwaiti telecom firm Zain’s African assets. Edited excerpts:
How is Standard Chartered poised to tap the current buoyancy in the investment banking space?
Our M&A (mergers and acquisitions) business is already in a very strong position—we are at the top of the league table this year, being the lead adviser in the three largest deals announced so far in 2010. We are now growing our equities platform. Through our acquisition of UTI Securities Ltd, we are looking to grow both our retail and institutional brokerage business. We have made several senior-level hires to upskill our capabilities and are also building our equity capital markets (ECM) business, where you will see some more hires. Fortunately, unlike some of our competition, we do not have to worry about a declining home market as our home markets are in Asia and Africa which are growing very well. So, to that extent, we are in a slightly different position from our competitors.
Key challenge: Shantigram says clients in India are very sophisticated and know a lot. The biggest hurdle is, therefore, the ability of banks to add value that clients can recognize and are willing to pay for. Mint
There is a pattern of only doing big-ticket deals?
Ours is a client-centric business model. We are not really fussed about just multi-billion-dollar deals. We can even do a $200 million deal. For example, we advised Tata Motors Ltd when they sold part of their stake in Telco Construction Equipment Co. Ltd, the construction equipment JV (joint venture), to their partner Hitachi Construction Machinery Co. for $250 million. At the same time we have done big-ticket deals...(such as) Bharti-Zain... The intent is really to be more relevant to clients—as you know, we bank with most of India’s top 350 companies. That intent is also the rationale for adding ECM (equity capital market) capabilities. Equity was the gap which we are now filling.
What are the challenges from the client side?
Clients in India tend to be very sophisticated and know a lot to start with. The biggest hurdle is, therefore, the ability of banks to add value that clients can recognize and are willing to pay for. This sounds simple, but is not so easy to execute.
How do you see the growth of investment banking from earlier days to now?
A lot has changed. In the 1990s, investment banking in India was all about raising capital. Companies did not have the global size or competencies that they do today, they had not discovered their “place”. Liberalization had thrown open lots of opportunities. There were a lot of young companies that were growing in the new environment and needed capital for that growth. M&A was almost non-existent.
Today, companies are far more mature, they know their place in the world and many are keen to globalize, which is creating new opportunities for investment bankers.
What are the key considerations in M&A? How much of a role does culture play?
The primary consideration for an M&A is the strategic fit. Would the business I want to acquire have strategic value for my current operations? Second, can I afford it? Can I finance it in a manner that doesn’t affect my balance sheet?
Finally, there is the cultural fit and, in the case of a cross-border transaction, the need for some amount of localization. These are the three critical parts of an M&A transaction.
Unlike in the 1990s, Indian promoters seem to be comfortable with lower equity shareholding. They talk about diluting their ownership and getting professionals to run it.
The change was inevitable. It is a generational change, a mindset change. New generations are saying, look dad, this business does not attract me, something else does. The older generation is saying it’s my legacy and my son or daughter does not want it. I will not force him or her.
Is it difficult for Indian companies to raise capital?
On the contrary, I think Indian companies have huge opportunities to raise capital. Indian banks have liquidity. Foreign banks are willing to lend to Indian companies. Equity markets are strong and, therefore, money can be raised through the capital markets. Private equity (PE) funds are focused on India. So there is enough and more capital.
But PE funds are concerned about high valuations.
PE funds face a fundamental problem. Most raise capital from limited partners (LPs), who can directly invest in the market. The challenge PE funds face in India is that most companies they want to invest in want to be listed, as the associated costs are relatively low. This is a business model issue, as PE funds have the money, but are unable to deploy it.
How do you view the current M&A trend?
The first M&A wave that happened in 2006 was directed towards Europe. The current wave is all about Africa and in resources. So you could see front-end acquisitions in oil, minerals, coal, copper, among others. It is also business-dependent. Certain companies in the technology space, for example, will still look at the US and Europe as that is their market. Investment banks with balance-sheet capability have moved away from a pure advisory role. Most of the larger players are those with balance-sheet strength, such as ourselves. The pure investment banks are largely reliant on equity, with virtually no business in debt capital markets. We are looking to do something different.
So balance-sheet funding is your unique selling proposition. With more banks such as IDBI Bank Ltd setting up their subsidiaries abroad, will you face competition?
We operate in slightly different markets. Their fundamental strength is in rupee financing, while ours is in dollar financing. Both are mutually exclusive and are not fungible. I personally think we can work together very well as we have complementary strengths.
Are you considering further acquisitions on the lines of your earlier ones—Harrison Lovegrove and Co. Ltd, Pembroke Group Ltd and First Africa Group Holdings Ltd?
Through the African acquisition, I’ve put a bet on the table. If there is another target, then I will bet with it. But more acquisitions are opportunistic at this point in time. There are one or two.
What are your current challenges and how is the deal pipeline?
The pipeline is quite active. Our natural position is on the “buy”. There are buyers in our market today, though not so many sellers. And “buy" also works well as we can bundle advisory with balance sheet. The immediate challenge is to set up the equity business and get it running in the next three to six months.