The Tata Steel-Corus deal is expected to have earned investment bankers ABN AMRO, Deutsche Bank and NM Rothschild & Sons, a commission of between $90 million (aboutRs405 crore) and $120 million (about Rs540 crore). “In terms of what it means for investment banking, it is very significant,” says a senior investment banker who did not wish to be identified. “There will be larger transactions and the fees will be larger.” Investment banks typically earn a commission of 1% of the deal value.
According to audit firm Grant Thornton, India saw 480 M&A deals in 2006 with a deal value of $20.3 billion (Rs89,340 crore). Of these, 266 ($15.3 billion) were cross-border transactions. Thus far in 2007, there have been 45 deals with a deal value of $14.5 billion (Rs62,494 crore) and 23 ($14.2 billion) of these were cross-border transactions. The rising figures are a draw for foreign investment banks. The only catch: While fees for cross-border transactions are close to global rates, those on domestic ones are far behind.
The range for fees on cross-border transactions is between 0.5% and 2% of the deal value, with the majority being at the international average of 1%. Some bankers claim the fees on domestic deals are very low given deal sizes, and range from 0.25% to 2% with the majority being at the lower end. None of the investment bankers Mint spoke to was willing to go on record about details of their fees, even as a percentage of deal sizes.
Cross-border transactions are complex, but not all domestic M&A activity is routine. “It is at the lower-end of small cap and mid-cap companies that you can add significant value,” says S. Mukherji, managing director of ICICI Securities. “Big companies know what they want to do, what makes sense and what does not.”
That makes the domestic M&A business people-intensive. Increasing competition from new investment banks and soaring salaries being driven by a limited number of bankers have upped attrition levels in most banks.
For many years, there were too many investment banks chasing too few deals. That pushed fees down. Even today, bankers continue to seek relationships with large business groups by bidding low. Most M&A deals involving public-sector firms are unremunerative for similar reasons. These factors, experts claim, will continue to keep investment bank fees low.
The Indian M&A business is different because it isn’t dominated by just investment banks. Several consulting and audit firms continue to operate in the area. Audit major Ernst & Young, for instance, is one of the most active when it comes to M&As, and it isn’t an investment bank. Some bankers believe that consulting firms charge lower fees and claim they try to make up by doing more deals.
Most bankers, however, are optimistic about the future of the business in India. One investment banker says the M&A business will pay off in the long run and companies should invest in building their practices.