I-banking dilemma: Staying standalone or going composite

The fall of Lehman Brothers and the acquisition of Merrill Lynch by Bank of America and an increasing dominance of integrated, composite banks in merger and acquisitions (M&As), may force standalone investment banks to reconsider their model.

“Globally, the days of standalone investment bankers are over. The difference between Citibank and Merrill is that Citi has commercial and retail banking, and can fund M&A deals at a cheaper rate of interest,’’ said an investment banker.

“We have done well as a standalone investment bank. If lending comes along, it helps. In the advisory business, quality is most important,’’ said the CEO of a global standalone investment bank, who didn’t wish to be identified.

“The top four-five names in the advisory business are the integrated banks,’’ said another banker, who has worked for a standalone firm. “The challenge we faced was that we didn’t have the ability to provide a full-scale package,’’ he recalled.

“In a bull market, everything works well. It’s only in a market like this, clients look for banks that can provide a complete package,’’ said the head of M&A of a leading corporate house in Mumbai, who didn’t wish to be identified.

To be sure, Merrill or Goldman Sachs are no standalone investment banks; they are practically like banks, which do everything (equities, debt, asset management) that a composite bank like Citibank does, except raising deposits. A few examples of standalone investment banks are NM Rothschild & Sons and Lazard.

“The other difference is that banks get protected in a crisis. Tomorrow, if Citi gets into some serious trouble, the Fed will bail it out. They won’t do it for a pure-play investment bank,’’ said H V Harish, partner, corporate finance, Grant Thronton.

Scales are tilting

If one looks at the recent large deals of corporate India (Tatas’ Corus buy, acquisition of Novelis by the Aditya Birla Group, Asarco by Sterlite), they were advised by composite banks like Citi, which could also bring in the funding.

Besides funding, composite banks also bring in local expertise. For instance, when the Essar Group acquired Algoma Steel in Canada, it could leverage on the knowledge of UBS, a composite bank.

“People in UBS had working relationship with Algoma and knew the company very well. When Essar went in, the scope for due diligence was limited. So it gives you a lot of comfort,’’ said an investment banker familiar with the deal.

Similarly, on a lot of local matters, like environment or competition laws, global banks can provide local knowledge. But relationship matters in this business, especially when you are dealing with promoters of family-run businesses.

This is where the Indian advisory firms like JM Financial, Avendus, Ambit, Enam and Edelweiss come in. “You can’t write off the Indian firms, which will dominate the mid-cap space. What has changed for say, JM Financial? They are paid for their ability to strategise, negotiate, structure deals innovatively,” said Harish.

Relationships matter, but when it comes to big cross-border deals, composite banks are increasingly scoring over standalone and local advisory firms.

“When Suzlon did the first few acquisitions, Yes Bank helped it a lot. But when Suzlon went for REpower, it opted for ABN Amro (a composite bank), though Yes Bank (a local bank) was also an adviser. When it comes to large, cross-border deals, the big composite banks control the stakes,’’ said a banker.

The scales may be tilting in favour of composite banks, especially in cross-border deals, but the local advisory firms may still thrive in good times on mid-cap deals.