Goldman Sachs Advancing in India Means Turning Half-Cent Fees Into Profit
The New York-based company that dominated global merger advisers for most of the past decade spent three years working on the transaction that vaulted it to second from ninth place in India. Its first share sale in India this year may be a $1.3 billion offer from state-owned Power Finance Corp., for which it will split a fee of 1 rupee (2 cents) with three other banks.
“It’s a hugely competitive market,” Manisha Girotra, chief executive officer of UBS AG (UBSN)’s India operations, said in an interview. “There are too many local and international banks. Everyone is here because the promise is huge.”
India is a proving ground for Chairman and CEO Lloyd C. Blankfein’s strategy “to be Goldman Sachs in more places.” One roadblock: The firm lacks licenses that will allow it to trade currencies and underwrite government bonds in India. Goldman Sachs also has to figure out how to squeeze profit from a market where companies are reluctant to pay for advising on mergers and banks accept near-zero fees for taking state enterprises public.
“Indian clients are very cost-sensitive when it comes to fees,” said Joel Perlman, president of London-based Copal Partners, which provides research for investment banks and private-equity firms. “The fee percentage in India is going to remain relatively small.”
To boost business, Goldman Sachs appointed Sonjoy Chatterjee, 42, as chairman of India operations in March. Having joined last June from ICICI Bank Ltd. (ICICIBC), the nation’s second- largest lender, Chatterjee is the first Indian-born banker to lead the firm in the country since it ended a venture with Kotak Mahindra Bank Ltd. (KMB) in 2006. Vijay Karnani, a 13-year Goldman Sachs veteran, was promoted to co-CEO along with Chatterjee.
Goldman Sachs has climbed to No. 2 in mergers and acquisitions and to 13th in arranging local equity sales in the past 12 months, according to data compiled by Bloomberg. That compares with ninth place in advising on M&A involving Indian companies and 16th in domestic equity underwriting in the four years starting April 1, 2006, just after the firm ended its partnership with Kotak Mahindra, Bloomberg data show.
The firm’s advance in M&A was helped by its role advising Reliance Industries Ltd. (RIL), headed by billionaire Mukesh Ambani. Reliance, based in Mumbai, sold stakes in 23 oil and gas areas in India to London-based BP Plc in February for $7.2 billion. Goldman Sachs worked for three years on the deal, which was delayed by a BP oil spill in the Gulf of Mexico, a person with knowledge of the matter said.
The relationship could lead to more M&A work for Goldman Sachs: Reliance was India’s most acquisitive company last year, with nine deals totaling $2.2 billion, Bloomberg data show.
The bank also agreed in the past year to manage a share sale for state-owned Power Grid Corp. of India Ltd. for about 4 cents in fees and to help finance Vedanta Resources Plc (VED)’s acquisition of oil operator Cairn Energy Plc’s Indian unit for as much as $9.6 billion, a deal in which Vedanta used its own mergers team.
UBS’s Girotra estimates that total investment-banking fees in India were about $550 million last year. Freeman & Co. LLC, a New York-based research firm, puts the fee pool at $1 billion, about one-fifth of the $4.9 billion for China.
Goldman Sachs’s annual revenue in India is about $100 million, according to a March 21 report by Guy Moszkowski and Steven J. Chubak, Bank of America Corp. (BAC) analysts who met in Hong Kong last month with the firm’s senior management team for Asia. That’s a quarter of a percent of the firm’s $39.2 billion of revenue worldwide last year.
Goldman Sachs is the only major foreign securities firm in India without either a commercial-banking license needed to engage in currency transactions or a permit to underwrite government bonds, known as a primary dealership license. Bank of America, Credit Suisse Group AG, JPMorgan Chase & Co. (JPM) and UBS have banking licenses in India. Morgan Stanley has applied for one and has obtained a primary dealer permit.
Executives at Goldman Sachs told the Bank of America analysts that the firm applied for a banking license and expects to receive one in three to six months, according to the report. The bank also is seeking a primary dealership permit, the former head of the India unit, L. Brooks Entwistle, told Mint newspaper last year. Edward Naylor, a spokesman for Goldman Sachs in Hong Kong, declined to comment.
Growth in Asia
India, where economic expansion and stock-market gains drove mergers and equity issuance to records last year, is among emerging markets that Goldman Sachs is targeting as the firm faces more restrictive rules in the U.S. and Europe on how it can deploy capital. The bank aims to double revenue from Asia outside Japan “over the next few years” to $10 billion, the Bank of America analysts wrote.
Asia accounted for 21 percent of pretax earnings and 18 percent of revenue in 2010, compared with 18 percent of both for 2009, according to the firm’s annual filing with the Securities and Exchange Commission. Goldman Sachs doesn’t disclose how much revenue or profit comes from India.
India is among countries -- including Brazil, China, Russia and Saudi Arabia -- where Goldman Sachs’s payroll has grown by at least 25 percent a year since 2005, according to a company presentation. The firm has about 100 people in its Mumbai office and employs 3,500 in Bangalore to provide back-office support and services to its global operations.
“We believe that both GDP growth and the relative fiscal stability of many growth countries are trends that could drive revenue opportunities across all of our businesses,” Blankfein, 56, said at a conference in New York in November. “Over the past five years, we’ve seen nearly three times the number of capital-raisings in India than we saw in the previous 10.”
Goldman Sachs units have invested about $2 billion in India, most of it since 2005, buying stakes in companies including Mahindra & Mahindra Ltd. (MM), Max India Ltd. and TVS Logistics Services Ltd. Ankur Sahu, 41, will move to Mumbai this year from Japan to run the Indian principal-investing operations with Sanjeev Mehra, according to an internal memo obtained by Bloomberg News in February.
The firm agreed to buy Mumbai-based Benchmark Asset Management Co. last month, giving it access to a market where assets managed by mutual funds more than tripled to 6.8 trillion rupees in the five years ended Dec. 31, according to the Association of Mutual Funds of India. Terms weren’t disclosed. Goldman Sachs, which set up its local fund unit in 2008, had no assets under management as of Dec. 31.
The bank also sees “significant opportunity” in private banking for the wealthy, Moszkowski and Chubak wrote.
Chatterjee, who worked 16 years at Mumbai-based ICICI Bank, where he was in charge of corporate and investment banking, government banking and international banking, declined to comment. The father of two girls, he played drums in a Mumbai rock band called Infrared and kept fit in London, where he lived from 2003 to 2007, by boxing in a gym near Baker Street, according to people who know him.
He’ll need to show off some of that footwork to persuade local companies to pay for advisory work when rival firms are willing to sacrifice fees to gain market share. The top-ranked bank worldwide in M&A and equity underwriting over the past decade, according to data compiled by Bloomberg, Goldman Sachs pitched for seven stock offerings of government-controlled companies in India in the past year. It got picked for two.
The first was the $1.8 billion offer in August by Power Grid Corp., India’s largest electricity-transmission company. Goldman Sachs and SBI Capital Markets Ltd. offered to accept a fee equivalent to about 4 cents each to work on the transaction, according to three people with knowledge of the matter.
The firm also was selected to help manage Power Finance’s sale of a 20 percent stake that could raise 57.5 billion rupees, based on current market valuation. The sale by the New Delhi- based lender to Indian utilities is likely to open in May, and Goldman Sachs has agreed to split a fee of 1 rupee with three banks to manage it, according to two people with knowledge of the matter who asked not to be identified because they weren’t authorized to discuss the deal.
The other firms are Bank of America, ICICI Securities Ltd. and JM Financial Ltd. (JM), according to a March 18 document submitted to the Securities and Exchange Board of India.
Goldman Sachs was among eight banks that provided a combined $6 billion of loans for Vedanta, the London-based mining company controlled by billionaire Anil Agarwal, when it offered to buy control of Cairn India Ltd. The deal didn’t generate advisory fees since Vedanta used its own team to negotiate the purchase, bankers familiar with the matter said.
“Balance-sheet support can be critical to winning large outbound deals, though clients are also looking for ideas and deal-execution capability,” Frank Hancock, managing director of corporate finance in India at Barclays Plc, said in an e-mail.
Chatterjee replaced Entwistle, who had run Goldman Sachs in India since 2006, when the firm ended its venture with Kotak Mahindra. Entwistle, 43, is moving to Singapore to become chairman and head of investment banking for Goldman Sachs in Southeast Asia, according to a March 18 internal memo.
The appointment of Chatterjee, who has a master’s degree in business administration from the Indian Institute of Management in Bangalore, made Goldman Sachs the last major foreign bank in the country to name an Indian to the top spot.
While at ICICI Bank, Chatterjee developed ties with Vijay Mallya, head of India’s Kingfisher Airlines Ltd. and chairman of United Spirits Ltd. (UNSP), which bought Scottish liquor maker Whyte & Mackay Ltd. for 595 million pounds ($968 million) in May 2007. ICICI Bank helped finance the transaction.
“What Sonjoy brings is long-term relationships with corporates,” said Girotra. “ICICI has a strong brand, and he was a carrier of that. He brings a lot of credibility.”
Goldman Sachs trailed Wall Street rivals such as Citigroup, Morgan Stanley and Bank of America in mergers advisory after its split from Kotak. UBS, based in Zurich, was first in M&A in the four years ended April 1, 2010, and Citigroup was the top share underwriter, Bloomberg data show.
Trailing Morgan Stanley
In the 10 months since Chatterjee began working at Goldman Sachs, only Morgan Stanley ranked higher in M&A in India, working on 11 deals valued at a combined $20.7 billion, compared with three transactions totaling $15.6 billion for Goldman Sachs, Bloomberg data show.
In stock sales, Goldman Sachs’s gains have been slower. It completed two offerings in the past year: Power Grid’s and an October initial public offering by Orient Green Power Co., a developer of renewable-energy projects. Citigroup worked on 13 deals, Bloomberg data show.
Goldman Sachs hasn’t arranged a bond sale in India since 2005, according to Bloomberg data.
One of Chatterjee’s first tasks may be finding an investment-banking chief. Sunil Sanghai, co-head of investment banking with Entwistle, quit last June and joined HSBC Holdings Plc as head of global banking for India. Chatterjee now holds the title of investment-banking head in addition to his chairman role. JPMorgan, Citigroup and Morgan Stanley, all based in New York, have separate investment-banking chiefs in India, as does Charlotte, North Carolina-based Bank of America.
Another challenge comes from Indian firms expanding into investment banking to compete for advisory business.
“We see the likes of ICICI Bank, Axis Bank and HDFC Bank getting rapidly geared up to become fierce competitors,” Barclays’s Hancock said.
Axis Bank Ltd. (AXSB), India’s top-ranked manager of debt sales, in November agreed to buy Enam Securities Pvt. in a deal valued at 20.7 billion rupees to bolster its equity-underwriting operations. Enam was the third-biggest arranger of stock sales last year and Axis was 19th, Bloomberg data show.
Mumbai-based HDFC Bank Ltd. (HDFCB), India’s second-largest privately owned lender, hired Rakesh Singh from N M Rothschild & Sons (India) Pvt. to head investment banking in India, two people with knowledge of the matter said. Singh will join HDFC Bank this month, they said.
“We are committed to beefing up our capabilities substantially,” HDFC Bank Executive Director Paresh Sukthankar said in an interview. “We hope to make our presence felt in coming months.”
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