Mumbai: They made money in the bull market and, now, investment bankers here are working out ways to make money in a bear one.
After advising Indian firms on mergers and acquisitions (M&As) and helping them raise equity and debt from domestic and overseas markets over the past few years, i-bankers are now busy identifying non-core operations or units of companies and finding buyers for these.
Non-core operations are those that are not related to the company’s main business.
Investment banks are also helping local firms buy back their own shares in a falling market and multinational companies, or MNCs, de-list their Indian subsidiaries or take them off the exchange.
“There could be lot of monetizing of the accumulated ‘excesses’,” said Ranganath Char, executive director, investment banking, at Mumbai-based financial services boutique JM Financial Consultants Pvt. Ltd, referring to non-core operations of companies.
Uday Bhansali, executive director of investment banking at financial services conglomerate Kotak Mahindra Bank Ltd, said there could be fair amount of share buy-backs and that MNCs that wish to delist their Indian subsidiaries could explore the opportunity now when the market is down.
After offering returns of around 45% for two years in a row, the Bombay Stock Exchange’s Sensex, India’s most tracked equity index, is down some 35% since January, and several well traded frontline stocks have lost even more.
JM Finance is currently advising India’s largest real estate company, DLF Ltd, which went public last year, and Kotak is advising Abbott India Ltd, the Indian arm of the US-based drug maker Abbott Laboratories, on their respective share buy-back plans.
According to equity analysts, many multinational firms are interested in buying out the publicly held shares of their Indian subsidiaries entirely and delisting their shares. This is not an unusual phenomenon in a falling market. In 2002, when the stock market slumped after the dot-com bubble burst, a large number of MNCs, including Cadbury Schweppes Plc. and the Philips group, had made open offers to the shareholders of their Indian units.
According to IT sector analysts, two large US-listed IT firms—Oracle Corp. and Electronic Data Systems Corp. (EDS)—could now attempt de-listing the shares of the Indian IT firms they acquired, i-Flex Solutions Ltd and Mphasis Ltd, respectively.
“Oracle had earlier attempted open-offer to delist i-Flex, while EDS is learnt to be interested in doing the same with Mphasis,” said an IT analyst of a US-based investment bank in India, who did not wish to be named.
Indian M&A volumes have significantly reduced this year.
In the first six months of the year, firms announced 265 deals with an aggregate value of $18.5 billion, against 335 deals worth around $44 billion in the first six months of 2007.
Total deal volume in calendar year 2007, from 676 deals, was $51.1 billion.
In 2007, “outbound deals had overshadowed inbound deals, completely,” said C.G. Srividya, partner, corporate advisory services at Grant Thornton India, a leading audit, tax and advisory firm.
In India’s largest ever inbound acquisition, Japanese drug firm Daiichi Sankyo Co. Ltd recently bought the 34.8% equity stake of the Singh family, promoters of New Delhi-based drug maker Ranbaxy Laboratories Ltd, for $2.4 billion. Bangalore-based GMR Infrastructure Ltd, in yet another big deal, bought 50% stake in Netherlands’ InterGen NV, spending $1.1 billion.
However, large investment banking units in India do not believe the momentum of past few years’ growth acquisitions and fund-raising activities of Indian companies will return soon.
“The second half will be very dry for M&As,” said Rohit Kapur, head of corporate finance at audit and consulting firm KPMG India Pvt. Ltd.
Kapur expects volumes of both domestic and cross-border mergers and acquisitions to fall significantly.
KPMG Corporate Finance topped Thomson-Reuters league tables for the first six months of 2008, in the mid-market category for global M&A advisory. According to the Thomson report, there was an 18.2% drop in worldwide mid-market M&A volume during the first half of 2008.
Other business verticals such as public floats and private placements that raked in advisory fee during the bull-run have already dried up in 2008. The volume of private equity transactions including private investments in public equity, or PIPE, deals and bulk deals by institutional investors have also dropped since deal valuations are not exciting buyers and sellers. As far as the depository services business goes, the case file of the last Indian company which listed its shares overseas has been archived long back, said i-bankers.
Investment banks are betting big on share buy-backs but not every company with battered share prices can afford buy-back offers.
“Buy-back offers can be expected only from non-capital intensive businesses with strong balance sheet,” said a senior investment banker with a US-based bank operating in India, who does not wish to be named. The case of DLF, which operates in the sector with the highest capital requirement, is an exception, he added.
However, another senior banker, who heads a smaller domestic investment banking operation and does not wish to be identified, said that even companies short of capital could look at various debt options to fund their share buy-back plans.
“Buy-backs also help contain the slide in share prices as it reduces the equity capital base,” he said.
Bhansali of Kotak does not agree. “Buy-back offers for Indian companies have not always helped in containing fall in share prices,” he said, citing past instances.
Some analysts also said share buy-backs help promoters raise their holding in a firm (and their personal wealth) at the expense of their firm.
But still, “it makes perfect sense for companies to buy and hold their shares which they believe should be valued at X but trading at X/3 or below,” said Ranu Vohra, managing director and chief executive of local investment bank Avendus Capital Pvt. Ltd which raised $24 million growth funding from a West Asian private equity firm this week, despite the market downturn.
Char of JM Financial added: “Good companies typically form long-term strategies, which look beyond several short business cycles.” This, according to him, includes selling equity to raise money in bull markets and buy-backs in a bear market.