Mumbai: I did not want to separate,” said Nimesh Kampani, chairman, JM Financial. “It was Morgan’s decision.” On Thursday, Morgan Stanley and JM Financial announced the end of a decade-old partnership. The former said it was buying the latter’s 49% stake in the institutional broking business for $445 million or Rs1,958 crore. JM said it was acquiring Morgan Stanley’s 49% stake in the investment banking business for $20 million or Rs88 crore. And Morgan Stanley had very good reasons for wanting to separate.
In 2007 itself it had three: Corus, REpower, and Novelis. With Indian firms such as Tata Steel (which acquired Anglo-Dutch company Corus Group on 31 January), Suzlon (it recently made a bid for Germany’s REpower) and Hindalco (it acquired Canadian metals firm Novelis on 11 February), shopping abroad for scale and synergy, transnational investment banks have a good reason to want an independent and completely-owned presence in India.
Cross-border deals, say investment bankers who do not wish to be named, require a cross-border presence and the ability to raise finance or even finance entire deals. Not too many Indian investment banks meet these criteria.
“The large cross-border deals can only be done by foreign banks because they will put money or their balance sheet behind a deal only when they have full control,” said Munesh Khanna, a partner at Mumbai’s Halcyon Capital, who has been an investment banker with both domestic and transnational firms and once headed NM Rothschild’s Indian operations.
Until December 2005, the investment banking landscape in India was dominated by three large joint ventures. That month, Hemendra Kothari sold his 47.3% stake in DSP Merrill Lynch to the Wall Street firm for $500 million. Three months later, Kotak Bank bought the 25% stake Goldman Sachs held in its investment banking and brokerage businesses paving the way for an independent entry by the firm into India.
And on Thursday, JM Financial and Morgan decided to go their separate ways. The era of independent deal makers, say some investment bankers, is over. “The way the India story is going, this was bound to happen,” said T.R. Madhavan, managing director, Centrum Finance, a Mumbai-based investment bank. Thus far in 2007, Indian companies have made foreign acquisitions worth $17 billion. “It is now the right time for Morgan Stanley to develop a wholly-owned full-service India platform,” said Hans Schuettler, CEO, Morgan Stanley Asia.
Even before the JM-Morgan Stanley separation, nine of the top 10 investment banks in the world had an independent presence in India; UBS, Lehman Brothers, CSFB, and Goldman Sachs are all recent entrants. Morgan Stanley could soon enter the market. The terms of separation between Morgan Stanley and JM Financial do not include a non-compete agreement, although the two firms have agreed not to poach executives from each other for two years.
Explaining the desire of transnational investment banks to go it alone in India, a senior executive in one, a recent entrant to the country, said firms such as his “no longer need local negotiators.” “The investment banking world no longer revolves around relationship managers,” said another executive who works for a US-based bank.
“There are no individual deal makers anymore.” Of the top 20 investment banks in terms of M&A deals advised for Indian companies, only three are Indian: Yes Bank, Enam Financial Consultants and Kotak Mahindra Capital. Indian investment banks have responded to their waning influence by focusing on smaller domestic deals or seeking smaller foreign investment banks with whom they can partner. S. Mukherji, managing director of ICICI Securities, investment banking arm of ICICI Bank, India’s largest private sector bank, said domestic firms would focus on “alliances” to help them complete cross border deals. JM Financial, Kampani pointed out, was still open to “all kinds of alliances.”
Meanwhile, he and his son Vishal Kampani, managing director and head of corporate finance at JM Financial, want to grow their firm into a financial services firm focusing on investment banking, asset management, asset reconstruction, and private equity.
And although some investment bankers say it will be difficult, the duo are keen on rebuilding their equities business. That shouldn’t surprise anyone. One of Kampani’s ancestors started an equity broking business in 1862, 13 years before the Bombay Stock Exchange. Asia’s oldest bourse, was born. The investment banking business of JM Financial dates back to 1973. Like him, Hemendra Kothari, who sold his stake in DSP Merrill Lynch in 2005, comes from a family of sharebrokers, going back several generations.
Gargi Banerjee and Rachna Monga also contributed to this story