‘Fat’ banks win in Indian M&A tussle

Appetite to lend to India’s ambitious acquirers may become even more important as big controlling shareholders,known as promoters,make larger overseas deals and have plenty of power to drive terms in a market crowded by an influx of investment banks.

Increasingly we are seeing that a number of promoters will tell you: if you bring financing,we will give you the advisory role as well,said Frank Hancock,managing director for advisory in India at Barclays,which has financed M&A clients.

Providing finance alongside advice gives more opportunity for commercial banks to generate revenue and gain credit in dealmaking league tables,which can beget further business.

It also ratchets up risk by exposing balance sheets to deals where borrowers can extract pricing that leaves little room for profit — or error.

Investment banks without the appetite or capacity to provide big chunks of finance must rely on bringing ideas and sectoral or geographic expertise in order to win advisory business.

For a pure independent adviser,nobody owes you a deal so it really is a function of how smart and how early you are in trying to make yourself relevant,said Sanjay Bhandarkar,managing director in India at advisory specialist Rothschild.

Standard Chartered,a commercial bank not scarred by the financial crisis,is viewed by many rivals in India as the most aggressive packager of merger advice with balance sheet.

The UK-based emerging markets specialist was lead adviser to Bharti Airtel in its $9 billion buy this year of Zain’s Africa operations and provided $1.3 billion in finance,the largest chunk.

It is also both the lead financing bank and joint lead adviser to Vedanta Resources,a London-listed and India-focused miner that recently agreed to pay up to $9.6 billion for control of energy firm Cairn India.

Clients in India prefer to use advisers as financiers,said Neeraj Swaroop,chief executive at Standard Chartered in India.

That’s a business model. We like to offer them a full range of services. When we have a balance sheet,then why shouldn’t we,he said.

SKIMPY FEES

While India is not the only finance-driven M&A market,the correlation is especially close given notoriously skimpy banking fees and a reluctance among some promoters to pay for pure advice,as well as the predominance of outbound deals.

Buyers crave the comfort of uninterrupted access to debt in an emerging market where availability of capital can be erratic.

While Chinese state companies have been able to tap cheap debt from government banks and buyers from Japan or Taiwan have access to ample pools of domestic bank lending,outward-focused Indian firms need dollar funding,for which domestic banks have comparatively limited capacity.

Financing is the key driver and determinant for large M&As,said Saurabh Agrawal,head of India investment banking at Bank of America Merrill Lynch.

A league table points to the nexus of finance and M&A in India,where Barclays,a relative newcomer to M&A in India,tops this year’s list for buy-side advice,just ahead of StanChart. The two rank fourth and second,respectively,in the overall table that includes sell-side advice.

Morgan Stanley and UBS,two traditional investment banks,rank first and third in the overall Indian M&A league table. Goldman Sachs,the global leader,ranks 7th.

To be sure,traditional investment banks also use their balance sheets to provide bridge finance,underwrite stock issuance and take derivatives positions,but they tend not to be in the business of making big buyout loans.

That provides an opening to commercial lenders in India that are also in the investment banking business

If we are putting the kind of balance sheet as we are out to customers then we would expect that the fee-generating capacity that comes from that customer is also something we participate in,said Naina Lal Kidwai,India country head at HSBC,which is expanding its investment banking unit in the country.