From an investment banking perspective, Vodafone India Ltd.’s $23 billion mega-merger with Idea Cellular Ltd., was a lopsided affair.
On one side of the table, Vodafone, which will own 45.1 per cent of the company, tapped advice from six external advisors: Morgan Stanley, Robey Warshaw, Bank of America Merrill Lynch, Kotak Investment Banking, Rothschild and UBS.
But Indian billionaire Kumar Mangalam Birla, whose Aditya Birla Group controls Idea Cellular, decided to shun the investment bankers altogether, instead opting to personally steer the deal with help from his internal team.
Mergers, especially mergers of this size (M&A action over $1 billion is rare in India), typically enlist the help of investment banks to ensure valuations are on point; perform due diligence by digging up any poison pills or skeletons (like a 8-digit severance package for upper management); identify synergies with target companies; and navigate the complex financial handovers which can include anything from exchange of shares or options to sell lock-up periods, conditional payments and buy-back options.
“Normally you would have investment banks in a deal of this size which is quite complex,” John Colley, a professor at Warwick Business School who researches mergers and acquisitions, told Bloomberg Markets. “Even if you don’t need new money, you would want the experience of these bankers, and it’s rare not to have them.”
Going to Great Lengths to Avoid Leaks
But unnamed sources close to the issue told Bloomberg that Birla was adamant about using an internal team in order to avoid any leaks, especially with regards to detail surrounding the transaction structure.
Over the course of the deal, Birla and his team – which included Saurabh Agrawal, a former South Asia head of corporate finance at Standard Chartered hired by Aditya Birla group last year to head up corporate strategy, former Morgan Stanley banker Ashish Adukia, who joined nearly three years ago and Ankur Dalwani, who previously worked as a managing director at Jefferies in India – went to great lengths to keep it private. They’d avoid larger, more prominent hotels to avoid being spotted while in London and stayed in different hotels than Vodafone executives when in Dubai and Abu Dhabi.
Eschewing investment bankers in dealmaking is becoming a bit of a trend in India, where companies struck a record $72 billion deals last year yet fees for investment banking, including M&A, debt and equity, fell to $463 million last year versus $491 million the previous year, according to Livemint.
“In some cases, the company in the middle of a transaction won’t even copy the bank advising on the deal when sending mails finalizing the details. It’s all about keeping control of each and every decision,” a banker who’s worked with major Indian conglomerate including Birla told the publication. “Increasingly you will see the large companies roping in external advisors only in those cases where they can’t bridge the gap. It will mainly involve the markets where they have no presence or no knowledge.”
Signs of a Broader Trend?
But it’s not just in India. Self-advised mega-mergers are also on the rise in the North American market as well.
When Comcast bought DreamWorks Animation for $3.8 billion last year, it handled the dealmaking without external investment bankers, instead hiring former Morgan Stanley banker Bob Eatroff as executive vice president of global corporate development and strategy.
And when AbbVie Inc. bought cancer drug developer Stemcentrx Inc. for $5.8 billion, the pharmaceutical company also navigated the acquisition with an internal team, which included JP Morgan Chase’s Henry Gosebruch, hired in December as AbbVie’s chief strategy officer.
In fact, according to Dealogic, in 2015, for public-company deals worth more than $1 billion, more than one in four (26 percent) of the deals were executed without financial advisors, up from 13 percent in 2014.
The technology sphere in general has helped to set a precedent for jilting the banking community. In 2014, Facebook acquired WhatsApp for $19 billion, Oracle paid $5.3 billion for Micros Systems, and Apple agreed to buy headphone maker Beats for $3 billion – all without advisory from investment banks.
Looking at these investments, it makes sense, given that Silicon Valley businesses aren’t necessarily acquiring on the grounds of finding corporate synergy or boosting earnings per share after close. They’re after attributes more complicated when they set out on an acquisition spree: they’re looking towards the future, towards the way we interact with technology, how we could potentially interact with these products in the coming years. And there’s just no way a banker could know that future better than the people driving these innovative companies.
Will Investment Banks Start to Feel the Squeeze?
But the notion that investment bankers are going to be squeezed out of M&A action by these tech firms is overplayed. Sure, the trends are likely disheartening for some investment bankers, but building out an internal team to exclusively execute this level of corporate development and strategy is mostly reserved for major firms planning a high level of acquisitions.
For a lot of companies in the mid-market and smaller range, using an external team made up of financial advisors from investment banks, is going to make more sense – financial evaluation and negotiation is, after all, their expertise.
There’s also the optics: during the buying and selling process, companies will need that external mediator to approach potential competitors, otherwise they’re apt to get iced out if they try to glean information on potential deals and strategy.
Realistically, the relationship between investment banks and companies isn’t souring anytime soon. Even with complaints about fees, there are just too many synergies, especially when investment is needed to handle the deal or complex financial trade-offs are involved.
Plus, who will companies use as a fall-guy when their shareholders ask why a deal fell through?
That’s the investment banker’s job.