'There will be more deals in the mid-market space'

Q&A: Sanjay Sakhuja

A total of 445 mergers and acquisitions (M&As) were achieved till December 15, 2008, worth $30.72 billion, showing an estimated 40 per cent decline in value for the year. Along with this value erosion and the closure of many global investment banks, the advisory fees for such bankers also came down.

Amid this mayhem, Ambit Corporate Finance managed to advise the successful $2.8 billion merger of Centurion Bank of Punjab with HDFC Bank, India’s largest domestic deal this year. Sanjay Sakhuja, managing director of the home-grown investment banking firm, spoke to Abhineet Kumar in an interview on the challenges M&As will face in 2009 and the opportunities despite the slowdown.

The second half of the year has seen a sharp decline in M&As. Have the deals fallen through after the credit squeeze?
There is overall slowdown in the economy. The commodity cycle has moved down so sharply that deal valuations are no more attractive. We are seeing deals falling through worldwide, even after advance level of negotiations have been achieved. If negotiations have not culminated in legal agreements, then the deals are at least being pushed back in India. Deal closures were earlier achieved in 6-9 months, now it is taking 9-15 months. However, enquiries are intact despite the volumes achieved declining.

Is the global credit squeeze going to cause lesser inbound acquisitions?
India is set to grow faster than China, even at a GDP growth rate of 6 per cent for the next three years. The number of global players who wanted to come to India will use the opportunity as the valuations are coming down. There are financial sponsors, buyout funds who raised capital and have allocated it for India. Patient ones,who were sitting by the side, will invest in the country now.

Do you believe that low valuation of Indian companies would also attract hostile bids?
I would be cautious on hostile deals in India, given the ownership pattern of the companies. It is more in the western economy where the companies are board-managed to a greater extent. In the US, the objective of the board is wealth creation for shareholders. In contrast, India has a general ownership pattern. Here, the owners have 30 to 50 per cent stake in the company. There is not much room for hostile bids here. In the Emami-Zandu case, a set of shareholders made the room for that.

How is the overseas acquisition spree of Indian corporates going to be impacted?
There would not be the kind of appetite for overseas acquisitions as was seen in the last 2-3 years. Earlier a lot of deals happened using equity as the currency for transaction as the valuations of Indian companies were high. However, in some sectors such as IT, the overseas acquisition spree may still continue.

How are the pure domestic deals going to shape up in 2009?
We may see some deals driven by distress. Commodity companies are available at attractive valuations. We can expect some deals there in the next 12-18 months. We will also continue to see deals in banking and financial services, along with pharmaceutical and healthcare industry in the next 24 months.

What are the opportunities that you see for home-grown investment bankers even as large investment banks have closed down globally?
Advice is personal; and domestic players have an advantage with their proximity to the market. The strength of international players lie in their ability to provide credit. With international firms facing crisis, we are able to get high-quality people and the attrition rate has also come down. Besides, we expect the average deal size to come down. There will be more deals in the mid-market space and that would not come under the radar of international firms.

What is the kind of pressure that investment banking has on its fee income?
Pure investment banking fees have come down by 30-40 per cent. But, firms also earn with providing the funding in which the income may not have come down.