The Dealmakers: Past, Present And The Future

Updated: Aug 26 2002, 05:30am hrs
Here is the latest version of the old fable of Prince Charming and the frog. Two women were walking through the forest when they hear this voice from underneath a log. Investigating, the women discovered the voice was coming from a frog: Help me, ladies! I am an investment banker who, through an evil witchs curse, have been transformed into a frog. If one of you will kiss me, Ill return to my former state! The first woman took out her purse, grabbed the frog, and stuffed it inside her handbag. The second woman, aghast, screamed: Didnt you hear him If you kiss him, hell turn into an investment banker The second woman replied: Sure, but these days a talking frog is worth more than an investment banker!

To get a succinct global take on these folks, click on to, and read this bit on investment bankers: When times are good, theyre real good; when times are bad, theyre real bad. You can get a five-figure bonus cheque one day, and be out on the street (not Wall Street) the next.

Investment banking is a cyclical industry, and when the market falls, it can fall hard and so can the hatchet.

The dot-com crash triggered renewed interest in investment banking, making competition for jobs particularly fierce. Two years ago, investment banks, consultancies, and bricks-and-mortar corporations were scrounging for fresh talent; now these firms are flush with eager MBAs and undergrads seeking stable jobs in a volatile economy... major players like Merrill Lynch, Goldman Sachs, JP Morgan Chase, and Credit Suisse First Boston all cut between 10 to 15 per cent of their staff, due to plunging markets, loss of revenue, and M&A sluggishness. Life is tough. Take a look at any local league-table on investment banking. The pecking order may vary, but it is all about the usual suspects: JM Morgan Stanley, DSP Merrill Lynch, Kotak-Goldman, ABN Amro Asia Corporate Finance(I) Pvt Ltd, Rabo, Citibank (Soloman Smith Barney-SSB) or a HSBC. What is the scene in India for these folks Are talking frogs worth more than investment bankers

Says ING Barings managing director & head for investment banking (India), Sunil Gulati: You see, you have to burn a lot of midnight oil. I know that there is a lot of envy, but it is a winner-takes-it-all business. There is no fixed revenue-stream. Seconds HSBCs director & head of corporate finance & advisory, K Balakrishan: I entirely agree with this view. Revenues are lumpy. I also feel that this business is a bit over-serviced at this point in time. Mr Gulati says that the market is maturing, but points out two areas of concern. One, the number of deals going around is smaller than the number of players going after them. Two, the juicy deals are within the folds of a few big houses like the Tatas, the Birlas and Reliance or add a few more.

Then, you have state-run units disinvesments. This again involves the big boys in corporate-India. Let us take rollcall of some recent big ticket deals, and you will get an idea: the Tatas got Videsh Sanchar Nigam Ltd, and they are also interested in National Fertilizers; Reliance got Indian Petrochemicals Corporation Ltd (IPCL), Reliance sold its take in Larsen & Toubro to the Birlas, Reliance merged Reliance Petro with itself; then there was the three-way merger deal between Birlas, AT&T, and BPL; then Indo-Gulfs copper interests went to Hindalco with fertilisers going away as Indo-Gulf Fertilizers.

I would say that relationships matter now, says Mr Balakrishan at HSBC.

Thankfully, for Mr Gulati the entire 14-member team jumped ship from Bank of America (BankAm) a few deals and mandates have been wrapped up. These include the in-house acquisition of a 49 per cent stake in Vysya Bank, First Pacifics exit from Escotel Mobile, Tata Chemicals interest in National Fertilizers.

ING Barings also represented the Indian Oil Corporation in an advisory capacity in its bid for IPCL. ABN Amro Asia Corporate Finance (I) Pvt Ltd has the mandate to find a buyer for the state-run, the Centres 29.15 per cent in the National Aluminium Company.

HSBC recently hired (or is it poached!) Naina Lal Kidwai from JM Morgan Stanley to head its investment banking ambitions. Not that HSBC has fared all that badly.

Here are the tombstones: IBP disinvestment, advisory to Hindustan Levers bonus debentures, Reckitt Benkisers delisting, sale of a few Indian Tourism Development Corporations properties amongst others.

But all this a far cry from about six to seven years ago when the nature of this business was not clearly understood. All concerned have been on a learning curve. Competition has seen fees almost die.

These tend to vary with deal size, and range between 20 basis points to a full percentage. Again, there is no point in claiming you hold mandates: you have to close them. Again, in time. Or else, ground realities change.

In times, like that it is better off to dump the deal and seek a fresh one rather than invest time and effort.

As Mr Gulati says: Fees are on a variable basis. There is a bonus-driven package structure. There might be an upfront fee which is small, but you have to close the deal for the cream.

There has also been a shakeout in this business. Take a look at these names and try remembering what happened to them: Dresdner Klienwort Benson (dead), Peregrine (committed suicide), Deustche Bank (regrouping), UBS Warburg (scaled down), BankAm (found it was not worth it), Lehman Brothers (where are they) ING Bank (has come back). It is an impressive list.

When the local market first opened up in early to mid-90s, these and a few who are still working at their desks, rode on the back of the overseas float-market global depository receipts, and little else. That market died. Much like the public issue market back home.

The picture as of now is divided between two clear sects: standalone investments banks in partnership mode like DSP Merrill Lynch, JM Morgan Stanley, Kotak-Goldman. And those who have investment banking as a part of a larger commercial bank like in HSBC, ABN Amro Asia Corporate Finance Pvt (I) Ltd, or a Citibank-SSB.

Then you have the truly standalones: UBS Warburg or an NM Rothschild & Sons (India) Pvt Ltd. And their desi variants like an Enam, SSKI, I-Sec, SBI Caps or an Ambit.

Claiming a strong knowledge-base is no more a differentiator. Rather, this aspect has got commoditised. It can no more be a USP. So what is the story that investment banks sell when they pitch for a mandate

Says ABN Amro Asia Corporate Finance (I) Pvt Ltds managing director, Frank Hancock: It is difficult to get your product sold on quality alone... it has to be part of your existing relationship or has to emerge from a cross-sell.

And that means, you just cannot say, here this is a Rolls Royce. Take it. Does that mean that an investment bank within the fold of a commercial bank (HSBC, ING Barings) or aligned with a commercial bank (Citibank-SSB) have a better chance as they can put their balance-sheet into play Even as a standalone investment bank may counter-claim that it can arrange for or syndicate Says Mr Gulati: I believe that you must put your balance-sheet into play. So many who tried not to are doing so. Again, this argument of not doing so, does not work in a loan-market. Mr Balakrishnan at HSBC puts it this way: The spectrum is like this. You can say it will be mandate plus balance-sheet or you can it is only about mandates. Then you have the middle-ground. At HSBC, it is not about getting mandates by cutting a cheque. Where do we stand The middle-ground.

A clearer articulation of this can also been seen in HSBC Holdings Plcs interim report for the half year to 30 June 2002 in the section dealing with India: Dealing profits, mainly on interest rates derivatives increased by $ six million, or 19 per cent, as increased co-operation between the investment and corporate banking businesses resulted in an increase in customised structured solutions and long-term derivatives products sold to major corporate customers.

The same question had been put to Mr Gulati on the winning ability and this is what he had then said: I think the folks who are hurting the most at this point are the stand-alone players. Especially, those who do not have the critical size to execute locally. I believe that high-quality local execution ability (no doubt combined with global strengths) is absolutely critical to succeed. This is both in terms of having the necessary insights into local conditions as also in terms of not always going for match-winning sixes and fours, but being able to graft in singles and twos. The best placed today are the integrated players. But again, this also is not easy: for it were, I-Sec and SBI Caps would have been the leaders! The bigger picture is that investment banking is getting to be tougher. If the cost-structure is not viable, you will be out of the running.

No one will tell you this, but it seems to come through: some players seem to be at sixes and sevens!