Merchant bankers count their lost crores

On a day when Indian telecom major Bharti Airtel's shareholders rejoiced, as its stock rose 4 per cent, following the disengagement of the deal with South African telecom major MTN, the merchant bankers who were advisors to the engagement had cause for disappointment.

Bank of America, Merrill Lynch and Deutsche Bank were advising MTN, while Standard Chartered and Barclays advised Bharti. Had the deal gone through, it is estimated the merchant bankers would have earned anywhere between Rs 150 crore and Rs 250 crore, to be split among themselves.

Now they will get a mere Rs 10-15 crore, which will include the 'drop-dead' fee — a term of British origin referring to fee that must be paid if a deal falls, according to estimates by senior merchant bankers.

MTN and Bharti have been negotiating since May 25 on a $23 billion cash and share swap deal, aimed at an eventual full merger. The deadline for the talks were extended twice, and recently the deadline was postponed to September 30.

Companies, according to merchant bankers, enlist the services of lawyers (for regulatory hurdles), investment consultants (those who work out the transaction costs and define the scope of work) and investment bankers (who look at raising resources to sponsor the transaction). "People generally forget that a merger and acquisition (M&A) is primarily about finding a sponsor for the deal to raise money, which explains the high fees," says a senior merchant banker.

The advisory fees for multi-billion deals — those above $10 billion — typically vary from 0.1-0.2 per cent of the size or anywhere between $10-25 million. For small-sized deals, the fee could be as high as 3.5 per cent of the size. "Banks have even started levying a commitment fee, too, which ensures a minimum payment even if the company loses the bid," said a senior investment banker.

The Essar group, for instance, is understood to have paid Citi $25 million (around Rs 125 crore) for the Hutch deal, even though it wasn’t successful.

The merger and acquisition advisor’s fee structure typically comprises retainer and success fees, besides reimbursements of expenses. Deals valued in excess of $100 million (enterprise value) are likely to have a fee structure involving all three components. Middle market investment banks’ fee structure may exclude the expense reimbursement fee, while for smaller middle market deals, the up-front fee may be waived.

And as deals get more complex, investment banks have also started levying a ‘drop dead’ or non-refundable fee in case of failed transactions. This compensates for the time and effort spent. The fee is between 0.5 and 1.25 per cent of the deal size.