Boutiques bloom on Deal Street
Of all the ways to describe mergers and acquisitions over the last one year, “plain vanilla” is not one. 2016-17 is one for the record books, generating $61.26 billion in announced deals, up from $27.62 billion in FY16, with a significant share coming from mega deals valued above $5 billion, according to data compiled by Thomson Reuters.
Some of these were Essar Oil’s sale of its Vadinar refinery and port to Rosneft, United Capital Partners and Trafigura Group Pte for a total of $12.9 billion; a $23-billion reverse merger of Vodafone India into Idea Cellular to create India’s largest telco; Nirma’s acquisition of Lafarge India’s cement assets at an enterprise value of $1.4 billion; a complex merger of HDFC Standard Life and Max Life under a three-step process which would have led to automatic listing of HDFC Standard Life; and most recently, IDFC and the Shriram Group deciding to merge some of their businesses to create a financial services behemoth with a market cap of $10 billion.
Boardrooms were flooded with such confidence that executives went far beyond the textbook-style acquisitions—Company A buys Company B—to get deals done. Deal-making is now being characterized by complex and creative financial structures. But all of this complexity can be risky from an execution standpoint. Shares of IDFC and Shriram Group companies have tumbled since the merger news.
There’s also the risk that some deals may not be able to cross regulatory hurdles. For instance, the Insurance Regulatory and Development Authority of India (Irdai) rejected the HDFC Standard Life-Max Life deal. Similarly, the proposed merger between IDFC and the Shriram Group to create a mass retail franchise with a universal bank at its core hinges on a crucial approval from the Reserve Bank of India, which could be hard to come by, Mint has reported earlier.
Complex structures, large deal sizes and uncertainty surrounding regulatory approvals mean that execution risks for the deals are high. The investment banks which are at the centre of these large, complex transactions ought to be cognizant of their execution risks. And that explains the rise of whip-smart M&A boutiques which are increasingly playing a role in shaking up the deal street.
The cynosure of all eyes for now is Arpwood Capital, a boutique investment banking outfit founded by veteran dealmaker Rajeev Gupta. Enthusiasm surrounding it is not without reason—it now has enough of a track record and large M&A deals. Barring the Idea-Vodafone deal where the Indian telecom company relied on its in-house M&A team, Arpwood advised on all of the deals mentioned above. MergerMarket, an M&A intelligence service provider, said Arpwood advised on deals worth $17.3 billion in 2016, putting it up at No. 2 in the M&A league tables, while Dealogic put it at the No. 1 spot.
In 2010, Gupta who was then in-charge of Carlyle Group’s India operations quit and went back to his first love, opening Arpwood. Before Carlyle, Gupta who has spent almost three decades in dealmaking, was the head of investment banking at Hemendra Kothari-led DSP Financial Consultants, which later partnered with Merrill Lynch.
Gupta’s dealmaking philosophy hinges on “focus” – persistent focus on catering to the needs of promoters. To his advantage, over the years, he has nurtured relationships with such promoters and he knows what they need—“a deeper engagement, far more handholding, an eye for detail and enhanced personal attention.” Gupta’s focused approach is clear during conversations with him where he stresses on the need for “creating” a transaction rather than doing the “execution” work.
According to industry experts, what works in favour of boutiques like Gupta’s is the relationship of trust that they bring to the table. “As they say, trust is your secret weapon in a competitive market,” said a leader at a private equity firm. Nurturing relationships for a desired outcome is almost intrinsic to Gupta who is also an avid gardener.
But there are certain quarters which dismiss such boutiques, especially those that develop a star culture around the founders. In personalized service-driven businesses like investment banking, often money goes away with people; hence it is imperative for boutiques like Arpwood which are off to such a good start to maintain momentum and eventually build an institution which goes beyond the founders. Started by Gupta and co-founder Raj Kataria, Arpwood Capital has a dozen members for its investment banking business now.
Also, boutiques have achieved success at a time when global bulge-bracket banks have shrunk their operations significantly in India, realigning their focus to their key markets after the 2008 global financial crisis. It is this ground that Indian firms are trying to occupy now.
And surely, Arpwood is not alone.
Founded in 2007 by former UBS investment banker Kenneth Moelis, the New York-based firm Moelis & Co. has grown to 110 partners in the past decade and is now turning revenues of $600 million a year. It was the 16th biggest earner from global M&As last year, with $385 million in fees, according to a Financial Times report that cited data from Dealogic. Moelis opened its first Indian office in 2013 and hired Manisha Girotra, former UBS India head as its country chief. Since then, Moelis has helped to restructure $500 million-worth of Essar Group’s US coal assets and advised Jet Airways on the sale of 24% of its stake, for $379 million, to Abu Dhabi’s Etihad Airways. And then, there are full service investment banking firms like Ambit Capital built on the likes of JM Financial or Edelweiss.
Globally, boutiques like Evercore, Centerview and Moelis are among the top 20 M&A fee earners in the world. To be sure, the rise of boutiques is not a new trend even in the Indian context. During the benign days of private equity (2008-10) when we saw huge inflows of private equity, there was a wave of boutiques including Spark Capital, Equirus Capital, Veda Capital Advisors, o3 Capital and of course, Avendus Capital- which literally milked the gold rush of venture capitalists to the consumer Internet space.
To be fair, global investment banks and leading local lenders have not entirely been pushed aside by the boutiques. According to an article in Euromoney, UBS was placed second, Goldman Sachs sixth and Morgan Stanley eighth in announced M&A deals in 2016, as per data from Dealogic.
Going forward, there could be scenarios that these boutiques get beaten, but there is no denying that they are here to stay provided they stay sharp in a few areas like tackling the execution/regulatory risks and working towards building their firms like institutions. Boutiques forging deeper relationships can soon turn into merger mavens which clients can count on for their loyalty. They can demand higher fees too because just as patients with a rare disease seek the best doctors money can buy, corporations too turn to a close set of investment firms that keep honing their skill sets.
Shrija Agrawal is Mint’s deals editor. Due Diligence will cover issues in India’s venture capital, private equity and deals space.
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