The Hindu Business Line : The men in the middle

This week, we will end our two-part series on M&As by looking at what role investment bankers and intermediaries like them play in the merger business. We will answer some interesting questions regarding bankers: Why do we need them? How do they work?

Talk about journalism with an impact: just days after our discussion on mergers and acquisitions (M&A), in my last column, there was hectic activity in the Indian M&A space. And guess what, there were deals made to the tune of $25 billion.

So this column is clearly being read by a lot of people with a lot of money! But of course, there are a fair amount of naysayers as well. These pessimists believe that Indian companies are coughing up too much money. They crib that our desi shareholders will bear the burnt of all this cross-border M&A activity.

Pshaw! Ridiculous I say! I have complete faith in our share markets and the sanctity of the Indian corporate governance environment and I ask all shareholders to keep trading very actively, at least till Wednesday when my rent is due.

We should, in fact, be encouraging our brave Indian corporate raiders. They are the pride of our nation and keep the tricolour flying high abroad. They plan well, work hard, attack ruthlessly and are fabulously successful. To all those enterprising, entrepreneurial Indian tycoons with billions to invest in M&A activities, I have only one thing to say: Keep up the good work; freelancing pays peanuts, my address is with this newspaper and I accept cheques. (eligible under Section 80 CCC).

But it is not just corporate India that is basking in the glow of M&A success. Oh no! There is another group of individuals lazing about in their hammocks, smoking cigars, sipping champagne and nibbling caviar. (And no, I am not referring to the owners of those recently acquired companies. They are still terribly busy, working day and night with their accountants and auditors closing the deal, cashing cheques). No no. I refer to that illustrious brotherhood of shrewd minds, tireless bodies and unwavering determination that march up and down the corridors of Indian corporate power. They are the true kingmakers. The true geniuses behind the mega-billion dollar deals. The lubricant of the M&A economy, the investment bankers.

To understand the need for investment bankers, we will need to do a little role playing first. So bring out the best in your acting skills for a moment. Imagine that you are looking to buy something rare and valuable. Like that explicit celebrity video of Paris Hil... err... What I really mean is that elusive first edition of Ulysses. However, wanting to buy something is one thing. And being able to find a willing seller (who does not ask for credit card) is another.

That is where the investment banker comes in.

The i-banker, as he is called, has ready access to a database of potential buyers and sellers for all sorts of businesses. To do this they work long hard hours with little sleep and almost no social life. They are bent over their laptops all day and their Blackberrys all night. This readily explains why all of them have a copy of that video with them in their laptop in addition to several other files of... Just wait a minute! We are talking about M&As here. Focus, Sidin, focus.

So like I was saying, investment bankers are the critical link in bringing buyers and sellers across the table. Once that job is done, and they make a tidy little packet there, investment bankers, after a modest holiday in Monaco where they shop for souvenirs like postcards, key chains and Lamborghinis, sit down for the next part of the process: evaluating the transaction.

This is tricky business. Any one of a thousand factors can affect the value of a company. The land and machines it owns, the cash in its bank account , the profitability of the business, its growth plan and, most important, the commission paid to the investment bank.

I-banking is almost exactly like real estate broking in Mumbai. So when the i-banker says something like "But look at those future projected free cash flows. There is millions to be made there. We must bid more! And more! And more! Guaha! Guahahah," what he is doing is exactly what your broker means when he says: "Saab I know it looks like there is only one bedroom. But if you put this potted plant like this and ignore that precarious, crumbling pillar, it is, in spirit, a luxurious 2 BHK."

Both of them depend on the fact that the deal closes at the highest possible price. And with markets at an all-time high and lots of money with Indian corporates, these times are good indeed for i-bankers.

Of course, in addition to matchmaking and broking, investment bankers provide a portfolio of other services too. They help companies go public and buyers borrow money; they structure derivatives and they even securitise loans and mortgages.

In fact, investment banks have today diversified into so many different things that they can hardly help recommend a stock through their equity rating service in the morning and sell thousands of the same shares through their trading desks in the evening.

And, seriously, who can blame them?

But whatever be the service they offer, rest assured that your friendly neighbourhood investment banker will charge you a reasonable 25 per cent commission.

All out of pocket expenses that are essential for the engagement, like travel, boarding, lodging, karaoke, ayurvedic massage, and aromatherapy sessions, are extra against actuals. But no bill demands please, you will have to take their word for it.

Seriously, what would the world do if it were not for investment banks? What would they do if it were not for those intrepid men with their Excel sheets, analysis reports and bi-focals? If you ask me, they would all gather and lament "TATA" to M&As in C(h)orus.

I know. Nice one.

(The writer, an alumnus of IIM-A, was a management consultant before quitting to work on a book and a full-time writing career)

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