The Hindu Business Line : Stanchart MF takeover

With a large, mostly untapped pool of household savings and its newfound investor appetite for equity mutual funds, the Indian market has once again become a sought-after destination for global financial services majors. Over a dozen large financial firms are said to be waiting in the wings to launch local mutual fund operations. It is, therefore, only to be expected that a fund house the size of Standard Chartered AMC, when put on the block, would attract a long line-up of suitors.

After parlays lasting several months, the fund house has finally been acquired by UBS AG for a reported consideration of about $118-120 million (Rs 520-530 crore). Standard Chartered AMC managed a total asset base of Rs 12,624 crore as of end-December and UBS AG has forked out a shade over 4 per cent of this asset base for this buyout.

Perspective on pricing

Seen purely from the standpoint of pricing, the purchase price appears much lower than that for previous such buyouts in the Indian market. Earlier acquisitions in the Indian mutual fund industry have seen the buyer shell out between 4.8 and 7.7 per cent of the assets managed for acquiring a partial or complete ownership of mutual fund operations. Among the recent cases, Societe Generale paid Rs 175 crore to buy a 37 per cent stake in SBI Mutual Fund in 2004, placing the valuation for the deal at about 7.7 per cent of SBI MF's assets. The purchase price for Sundaram Mutual Fund's stake sale to BNP Paribas in 2005 valued the former at 7.2 per cent of assets managed. Seen in this light, the valuation for the deal may appear to be on the lower side.

But the moderate valuation for this deal may have a lot to do with the mix of assets managed by Standard Chartered AMC. Equity assets account for just 21 per cent of the assets managed, with the rest being made up by debt and liquid funds. Equity assets, because of their higher fee structure and greater stability, tend to offer far greater value to an acquirer than debt and liquid assets. Debt and liquid fund investors are wooed mainly on the basis of lower fee and expense ratios, making for rather thin margins on such assets. However, with equity fund mobilisations really taking off over the past year, UBS probably sees substantial potential for ramping up equity assets through new fund launches.

Strategic benefits

The strategic benefits of buying into an entrenched player such as Standard Chartered AMC also need to be taken into account. With the industry already growing at a rapid pace, the buyout would allow UBS to make a quick entry, without going through the long-drawn out process of setting up a local operation. Acquiring the necessary infrastructure, hiring scarce fund management talent and designing and obtaining regulatory clearances for over 16 new products (which StanChart already offers) would certainly pose a challenge in a market teeming with new entrants.

In any case, the final word has not yet been said on the valuation of this deal. The final purchase consideration is said to be subject to "adjustment", based on assets under management at the time of the deal closure. Since mutual fund assets (especially on the debt side) tend to be quite volatile from month to month, the final purchase price may well turn to be quite different from the one announced now.

There have been previous instances in the industry where the purchase price has been revised downwards after the announcement, to factor in changes in the asset base at the time of the actual transaction.

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