Mumbai: An increasing number of Indian investment banks (I-banks) are forging alliances with overseas I-banks with a strong regional presence for handling cross-border deals.
Axis Capital Markets (India) Ltd and IDFC Capital Ltd have entered into such arrangements recently; Kotak Mahindra Capital Co. Ltd has just got into a new tie-up on top of two it already had; Ambit Corporate Finance Pte Ltd and ICICI Securities Ltd (I-Sec) are scouting for partners. I-Sec already has two such alliances.
With the majority of India-specific cross-border deals being clinched by foreign banks, these alliances are a low-cost solution for Indian I-banks seeking to compete with global banks, said I-bankers.
In a scenario where cross-border deals are on the rise, domestic merchant banks face a situation in which they can either enter into such tie-ups or lose out to global I-banks that have a strong presence in India, said one I-banker who did not want to be named.
Kotak Mahindra Capital, the investment banking arm of Kotak Mahindra Bank, this week forged alliances with Sumitomo Mitsui Banking Corp. (SMBC) and SMBC Nikko Securities Inc. of Japan to tap the growing number of mergers and acquisitions (M&A) transactions involving Japanese companies.
Kotak I-bank already has a tie-up with Evercore Partners Inc. for cross-border M&A advisory between India and the US, the UK and Mexico. In Europe, the firm is a member of Mid-Capital Alliance—a group of boutique I-banks that have a presence in all important European markets. This was formalized in mid-2012.
Sourav Mallik, senior executive director, M&A, Kotak I-bank, said, “We are positioned to serve the four most important regions for cross-border M&As in India—the US, the UK, Europe and Japan. These partnerships connect India, one of the fastest growing economies in the world today, with the four largest global pools of capital.”
The firm has also entered into similar arrangements with I-banks in South America, South Korea and South East Asia but they are non-exclusive. This means, the foreign counterparts have the option of working with the Kotak outfit along with any other of their choice for M&A deals.
Axis Capital, the I-banking arm of Axis Bank Ltd, this week forged an alliance with US-based Robert W. Baird and Co. to focus on cross-border M&As between India and Europe and the US.
“Many of our clients are looking for global opportunities for various reasons. Some are looking to gain market access through the brand or distribution network, while others (are doing so) for technology and yet others want to be near offshore clients,” said Nilesh Shah, deputy chief executive, Axis Capital.
Such alliances seem to be the most effective method as they create a win-win situation for both parties, Shah added.
Ajay Saraf, executive director at I-Sec, said such tie-ups help domestic investment banks get a foothold in the overseas M&A market and allow them to have a share in some major deals in regions where their overseas partners have an expertise.
I-Sec tied up in 2011 with Oppenheimer and Co. Inc. for the US market and Canaccord Genuity Corp. for Europe. “These alliances help domestic I-banks save on the expenditure involved in setting up overseas offices and hiring people,” Saraf said.
According to Mallik of Kotak I-bank, the local bank would have a higher level of regional coverage than global banks in each market. “Such alliances offer benefits by leveraging local relationships, coverage, knowledge and regulatory strengths of our partners, rather than recreating and duplicating the same with recruited talent in each other’s markets,” he said.
The increase in the momentum of inbound deals provides an edge to domestic banks and has made these alliances important, said Aditya Sanghi, president and managing director, investment banking, Yes Bank Ltd.
“Through 2005-2008, outbound M&As (Indian companies acquiring entities overseas) had momentum and we were reaching out our partner network seeking ideas on targets in their markets. Last two years it’s been a reversal of sorts and accordingly we are working with several global corporations originated though relationship of our alliance partners in acquiring Indian businesses,” Sanghi said.
Yes Bank has four exclusive partnerships—with Japan’s Shinsei Bank, Israel’s Poalim Capital Markets, South Korea’s Hana Bank and Harris Williams and Co. of the US.
IDFC recently entered into a partnership with Kempen & Co. and Centerview Partners Holdings LLC, the adviser for Kraft Foods Inc. when it acquired Cadbury India Ltd for $19 billion (around Rs.1.04 trillion). IDFC has not yet made any formal announcement on these tie-ups.
Ambit Capital, which has a tie-up with Societe Generale SA since 2009 for tapping M&A opportunities in Europe, is now scouting for partners in Japan and the US for strategic alliances. “We plan to tie up for Japan and the US markets with like-minded partners,” said Vinod Wadhwani, director at Ambit Capital. “The US-India corridor has seen consistent M&A deal flow and now the India-Japan corridor is increasingly becoming active for cross-border M&As.”
In a slowing global economy, the number of cross-border deals has fallen to 285 in this calendar year until 18 December from 339 in the year ago, according to VCCEdge, a financial research platform of VC Circle. In terms of value, there is even a sharper fall—from $34 billion to $18 billion.
As a percentage of overall M&A deals (including domestic ones) in India, the share of cross-border deals stands at 46% this year, marginally higher than last year.
“It is always better to be prepared for more competition,” Wadhwani said.
Shah of Axis Capital is bullish on cross-border deals. “India has moved from the fringe to the centre of the world economy... Indian board rooms are also expanding globally and we expect more and more cross-border transactions in years to come,” Shah said. Saraf of I-Sec expects the trend of entering into strategic agreements with regional banks overseas to pick up further as cross-border deals are on the rise. He also pointed out that domestic banks may explore newer geographies for forming these alliances.
“Africa may soon emerge as an important region where domestic I-banks may seek such tie-ups. These arrangements will mainly be driven by the rich resource base of Africa and increasing interest of Indian firms in such assets,” said Saraf.