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August 20, 2007

The investment banking boom in numbers

Business Today has a cover story on booming business of investment banking.

So how much exactly are promoters willing to fork out for I-banking advice and deal execution? Ravi Sardana, Vice President, I-Sec, the investment banking arm of the ICICI group, warns that when deal sizes increase, companies typically tend to opt for a fixed-fee format. Nobody's complaining. "In billion dollar deals the fees can vary from 0.10 per cent to 1.5-2 per cent," he offers. For instance, when a few months ago the promoters of Anchor Electricals sold an 80 per cent stake to Matsushita of Japan for Rs 2,000 crore, Kotak Mahindra Bank, which represented Anchor, pocketed a fee of Rs 25 crore, accounting for 1.25 per cent of the deal size (see Laughing All the Way from the Bank, to find out how much bankers are taking home). "Fees are stable. There hasn't been any fee compression for the past 24 months," says Vedika Bhandarkar, Managing Director & Head of Investment Banking, JP Morgan.

f the likes of UBS and Citi-which is second to UBS in fees earned in 2007, with $70 million-are hogging the M&a show, it's because they're players with a global platform, whose consolidated balance sheets can be leveraged during a buyout. For instance, in the Hindalco-Novelis deal, UBS (along with ANN AMRO & Bank of America) threw the Birla company a $2.8 billion debt lifeline. "With companies doing global M&A, financing becomes as important as advice," says Sardana. Pure investment banks like JM Financial for their part stress the value of advice, along with decades of relationship-building. Says Kampani: "New ideas are critical. As are relationships. The two, along with the ability to finance deals, make a perfect combination." Yet, leveraged buyouts are slowly but surely gaining ground, with I-bankers earning in fees $13.80 million from nine such deals in 2007 so far. The advantage of such buyouts: Debt can be less costly than servicing equity even as it provides tax breaks.

But if the global banks are beginning to put the domestic veterans in the shade in M&As, on the capital markets front it's another story. UBS, for instance, isn't a major player in capital raising, earning just $7.6 million from four transactions. Citibank, however, is collecting close to $20 million from initial public offerings and follow-on issues. The leader, though, is DSP Merrill Lynch, which has raked in fees of $28.3 million so far in the year. Morgan Stanley ($16.1 million), Kotak Mahindra Bank ($12.7 million) and ICICI Bank ($10.3 million) are the others who are strong in the primary market, aided in small measure by their strong retail reach. And the fees in this arena are relatively stable. Says Aditya Sanghi, Managing Director-Investment Banking, YES Bank: "Commissions in the IPO and follow-on market are 2-3 per cent."

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.