India Inc and the equity capital markets are witnessing a blitzkrieg of deal activity, unprecedented in the last decade. Whether its big-bang listings by new age unicorns or buyouts by cash rich bulge bracket private equity funds or inbound deals by giant MNC’s, everybody wants a piece of the India pie.
And domestic i-banking heavyweight Kotak Mahindra Capital Company is clearly riding the desi deal wave.
In the last 15 months, the firm has advised on 20 M&A deals worth nearly $10 billion, including the $848 million Pharmeasy-Thyrocare deal and the buyouts of Big Basket and 1mg by the Tata Group. Not to mention as many as 33 equity capital markets deals during the same period which include IPOs by Zomato, Gland Pharma and the Lodha Group.
Moneycontrol’s Ashwin Mohan caught up with Sourav Mallik, Joint Managing Director, Kotak Mahindra Capital Company for a free-wheeling chat on the challenges of stitching together transactions during Covid-19 and the key trends that emerge from the ongoing frenzy on deal street .
Mallik, an alumnus of IIT Delhi and IIM Ahmedabad believes that in the post Zomato IPO era, India is here to stay in the context of being a meaningful and viable forum for listing of new age digital companies .
The veteran dealmaker who is passionate about puzzles and travel and counts Suits and Blacklist as his favorite Netflix shows adds that corporates have realised that they can't really be fully digital and neither can they afford to be fully physical. This even as he recollects a hilarious Covid-19 induced gaffe bang in the middle of heated deal negotiations. Edited excerpts:
What are some of the key challenges that you faced as a dealmaker during the COVID-19 phase? There would have been an absence of one-on-one meetings with clients, colleagues and your peers with whom you work on deals. Would you say the virtual interactions have perhaps diluted the charm and camaraderie which is usually associated with vigorous deal making?
Let’s split up the entire investment banking deal process into three parts –origination, execution and closing of a deal. In the origination phase, whereby you obtain a mandate, and then you have the entire execution phase, which includes the critical negotiations towards the later part of the deal, and then the aspects of signing and closing the deal.
Historically over a long period of time we’ve been used to executing transactions, where we have not had significant in-person interactions with our clients or counterparties, especially in cross-border deals. We have been used to extensively working with phones, emails, documents and conversations. It's just now that the relative proportion of video-conferences is a lot more as compared to earlier situations. Hence, we face limited challenges in the execution and closing aspects of the deal.
Having said that, I think it does create a little bit of a discomfort in the origination phase when you're trying to solicit for business. Trying to build up a relationship with someone that you haven't met before and are meeting for the first time over a video-conference can be challenging at times.
Even during the execution phase, we have faced challenges. For example, how do you do a visit to a manufacturing facility to evaluate the efficiencies of a manufacturing process? We've worked with some solutions, we've done video plant walk through with live commentary, but you don't get the touch and feel as in a physical visit. Some people are comfortable with that and some are not.
In terms of negotiations, I think what we miss the most are probably the breakout sessions. When you are in a detailed negotiation session, and you have a deadlock of sorts, you tend to step out, have a conversation on the side and try to have a breakout session, or pick up the topic again over an informal drink in the evening, which is very difficult to do in the online world. In the online world we also rely more on the written word as opposed to the oral conversation, which also tends to harden positions. We have had to adapt to deal with all these situations.
But the thing I miss the most is writing on my whiteboard. Especially with my colleagues, when we are trying to discuss a particular matter, we used to write on the whiteboard, which we can't do now. So, that takes out the social interaction, and does take a little bit away from the entire experience. We're all hoping, this is a transitory phase. Having said that, there are things that we have learnt during this phase of our lives, which we will borrow from even when we go back to life as it was pre-pandemic, and maybe the extent of travel will come down.
Sure. Sourav, I've spoken to some of your peers and all of them have an interesting lockdown story up their sleeves, which transpired while they stitched together deals. Any memorable anecdote or incident that you would like to share that makes you chuckle?
During the months of Jan-Mar we had started physical meetings a lot more. During one such meeting, there were about four or five of us in the room. And in the middle of a rather heated discussion, the gentleman on the other side tried to drink water through his mask! He went blank and was wet all over, that was memorable to say the least. But that's the kind of stuff that can happen!
What are some of the key factors which are driving the current euphoria on deal street which is witnessing frenetic activity in m&a, private equity as well as equity capital markets. From global investors to private equity funds to VC’s to strategic suitors, everyone wants a piece of the pie.
Today we are in a completely different era compared to 15 years back. Back then, we used to talk year-on-year, now we are talking quarter-on-quarter.
There is a need and a desire to get size and scale at a fast pace, and there is universal acceptance that to grow at a certain pace, it is difficult to grow organically. Therefore one has to look at inorganic options as core to the business strategy. One needs to move fast and quickly. If you don't do a deal today, the deal may be gone tomorrow. In that particular context, to gain size and scale has become imperative and hence you are trying to do more of M&A.
There is a lot of business confidence for larger companies which are leaders in their business segments. This business confidence is also coming from the capital that is potentially available to such companies.
The combination of these two factors, the desire to create size and scale quickly with capital being available is what is really driving a lot of the investment banking activity, whether it is m&a, capital market activity or private capital activity.
This trend will sustain for a reasonable period of time. The other trend which is driving a little bit of attention is to become regionally self-reliant. The focus has been on building buffer stocks, building manufacturing capabilities, closer home particularly in sensitive areas like healthcare or pharma.
Alright, now shifting focus to Kotak Investment Banking. You have had quite a busy FY 21 with 12 m&a deals valued at $6.6 bn. And in a short span between April to June, your firm has worked on 8 m&a deals valued at $3.1bn. How does the M&A pipeline look going ahead?
The pipeline is quite robust. We’re in the middle of quite a few transactions, and a few announcements are expected in the coming days and weeks. It’s not just in a particular sector, it is spread across multiple sectors. There are deals in the entire digital ecosystem, healthcare and pharma, consumer and specialty chemicals, TMT, Infra, and even Industrials.
We expect the current year to end on a reasonably high note and it probably will be among the best years for Kotak Investment Banking.
The audacious $848 million Pharmeasy-Thyrocare transaction shook up corporate India as it was the first acquisition of a listed company by an IPO bound unicorn. Your team worked on this deal. Do you expect more such omni channel format deals going ahead where unicorns and traditional listed firms join hand or was this just a one-time exception of a transaction?
This trend is definitely here to stay. There's going to be many more of such deals in the coming years. Even the Tata-Big Basket and the Tata-1MG deals are additional examples of the omnichannel strategy. In the Indian context people have come to a reasonable conclusion that India needs a bit of both, physical distribution and fulfilment as well as online distribution.
We can't really be fully digital neither can afford to be fully physical. It has to be a combination of both. Will it be a digital company acquiring a physical company or vice versa? That is a function of who has the capital and who has a better management team to drive the combined business. Certainly the thesis for such businesses to come together is pretty clear and here to stay, and we hope to do many more of such transactions.
Has the stellar debut of Zomato on the bourses settled the long pending India listing vs US listing debate once and for all when it comes to new age companies which may be unprofitable but are valued aggressively?
We always talked about these new age companies listing in India and we have always had the view that investors would accept such companies. But the proof of the pudding is in the eating. It basically confirms that the investors have the maturity to understand and appreciate these kind of new age companies. So, it is definitely a viable alternative than to list in other parts of the world.
Going forward whether or not a company chooses to list in India or list overseas is going to be a function of multiple factors. But certainly, India is here to stay in the context of being a meaningful viable forum for listing of new age digital companies. It has also shown that investors investing in India are sophisticated enough to understand and appreciate these kind of companies.
Right. Overseas direct listing was announced as a big-bang move by the government in the budget. A year later, it seems to have been mired in tax issues and hasn’t really taken off in terms of requisite amendments to related laws. Has it become a non-starter of sorts now especially because Zomato has given the confidence to firms to not be forced to list abroad?
There are a couple of nuances here. One is overseas direct listing of an Indian company and the other is the overseas listing of an overseas company which has operations in India. The two are slightly different and for the second type of company, tax and other related matters may require such companies to restructure to list in India, so you could potentially still see overseas listing of overseas companies with Indian operations; but may not be through the overseas direct listing of Indian companies until some of the tax issues are sorted out.
Thus if there is a structural reason for which one would want to list in one geography versus another, one may still continue to do that, but clearly the Indian market is now a meaningful viable forum that is now proven and available.
The pharma and the healthcare sector has been one of the beneficiaries of Covid-19 with a focus on health, immunity and wellness. The sector has seen both minority and control deals, led by cash rich private equity funds. What’s your outlook in this space and which sub segments or pockets are expected to see deal activity going ahead?
Healthcare and pharma has been one of the better performing sectors for Kotak Investment Banking. Clearly the emphasis on health and wellness has gone up quite significantly. Healthcare security by itself has become an important topic of discussion.
We are witnessing deals across segments from diagnostics to FDA approved manufacturing facilities. There is be a desire and intent to localize a lot more of the production. Today we import a lot of our APIs, which could be manufactured locally going forward and that could lead to deal activity.
There will be consolidation within hospitals and one may see the emergence of larger chains of hospitals. Radiant and Max transaction is one such deal on such themes.
What are some of the key regulatory and policy changes that you expect from the government and the regulators to further incentivize FDI and deal activity?
Regulators have been proactive in multiple facets particularly as we have faced challenges through COVID.
From an FDI point of view over the last 10 years a lot of it is done. One of the last bastions was the increase in the FDI limit for insurance which got approved in the current Budget. So, now from a sectoral cap point there is not much one can expect. However, from a process, procedures and systems point one could expect some relaxations. For instance, cross border mergers, there is a facilitating regime, but there could be potentially more that could happen over there, which allows companies to move seamlessly across jurisdictions in a slightly more efficient manner.
Before we wrap up, what are your top 5 sectoral picks for deal activity in FY22 in both M&A and equity capital market fund raising ?
It's going to be fairly broad, but if I had to pick a few sectors, it would be the entire digital ecosystem, healthcare, consumer, specialty chemicals and financial services. These sectors are expected to do well, where we will see maximum amount of activity both in M&A and ECM.