UBS is the largest investment bank in Asia. It is a market leader in Australia and among the top five in Japan. UBS' joint global head of investment banking, Alex Wilmot-Sitwell, was in Mumbai recently, his second trip to India after seven years. Also a member of the group management board of UBS, he graduated from Bristol University with a degree in Modern History.
He said his history background gave him a perspective to understand and analyse developments differently. In an interview with Kausik Datta, he discussed his views on the Indian merger and acquisition (M&A) scene and his company's plans.
Rapid growth of the economy, robust stock markets and manageable inflation have resulted in a situation where M&A activities in India look as if they can only go up...
Although up and up is a dangerous thing, it appears to me that the M&A activities will keep on increasing in India because of a combination of factors such as exceptionally strong growth dynamics, strong and transparent laws, corporate ambition to grow, and an easy access to liquidity. I think, the rise in M&A activities will carry on for some time.
Over the past two years, I have seen Indian companies look to expand their operations overseas. It clearly indicates the enhanced confidence of these companies. Coupled with it, there is a growing perception outside India that Indian companies can take on, execute and implement large acquisitions.
Also, my observation is that the growth opportunity in the Indian market is substantial, based on huge growth in consumption power.
Would you like to identify some sectors where maximum M&A may happen by Indian companies in overseas markets?
The obvious example is steel. In addition, I think technology and software are the other two areas where Indian companies may expand overseas. One contrasting trend could be in the financial sector where international financial giants are expected to invest in India rather than Indian companies going abroad.
Telecom companies, I think, need not go overseas as there are huge opportunities in the country itself. But resource-based businesses such as metal, mining, oil companies may look at expanding outside the country.
Six years ago, Tata Tea shook the world's M&A scene by acquiring Tetley, which was larger than it. Last month, Tata Steel announced its bid to acquire Corus Steel, which is four-times its size. Do you think these are stray incidents?
Well, the Tatas are not small. Why are you looking at the companies - investment vehicles - in isolation? This is no aberration. Globally, large groups can acquire large companies.
The reasons being that large groups can manage risk more easily, they have access to funding, they can generate funds by leveraging their balance sheet, and they have got the management depth to integrate and execute a big acquisition.
So, in short, Indian companies that are part of a large group may continue the trend of acquiring firms that are bigger than them. But this kind of stories where David takes over Goliath are unlikely to happen in small companies.
What is the biggest challenge in the post-acquisition scenario?
Integration. The biggest risk is to show that you are paying the price that is justifiable. And you can justify the price by reaping benefits from the acquisition.
There is no way you can do that without proper integration through which you can achieve better synergies of scale, better operational benefit, and implement future expansion plans.
How long will it take Tata Steel to integrate Corus for the acquisition to be seen as successful?
I have not studied the deal and, therefore, can't comment on that.
Is there any thumb rule?
No, there is none. It varies from group to group. The Tatas are possibly a group which is able to have a longer-term plan to achieve return from a deal. This does not mean that they are less disciplined.
Given the family-controlled structure, they can probably afford to have a slightly longer-term approach than a listed company with very growth-minded shareholders. Every group has its own benchmark to get return on its cost of capital. Every group measures its acquisition strategy differently.
However, most of the people in the public market want to see value creation for shareholders in 12-24 months. But please bear it in mind that every situation as well as market is different. Having said that, I am sure that the Tatas have a clear idea to earn return for their shareholders.
With the Corus deal, investment by Indian companies outside India will exceed inflow of capital in the country. Is this a disadvantage for a country like India?
I am not an India expert. But my personal view is that there has to be a balance between overseas investment and inward foreign investment. But I am a believer in free markets.
With liberalisation, Indian markets have become more accessible to international countries. Due to its favourable demography and robust growth, India is one of the most exciting markets in the world.
Therefore, it would be a pity if international companies' investment is impacted by local regulatory framework. The Tata deal, which may make the outflow, more than inflow, is tiny in comparison to the total market.
Which are the areas that need more liberalisation?
I think, liberal foreign exchange rules and a free float of capital are of great benefit to countries. If you look at countries where exchange control existed, they managed to record net inflows after the abolition of exchange controls.
What is your expansion plan in India?
This is one of the most important markets for us. We wish to build a leading investment banking set up in India.
Also, we want to have a large wealth and asset management business here. It's tiny now. We have a big global asset management business, which has invested in Indian companies.
The three pillars of UBS are investment banking, wealth management and asset management. We have an active interest in building India. Therefore, we look to grow our business, expand it by bringing more people to our business. We have an offshore centre in Hyderabad, which we are seeking to build up.
In the course of the next 12 months or so, we will have 1,000 people in Hyderabad. Currently, we have 300 people in India. We seek to be among the top three players in every market we are in.
What additional services will you offer vis-à-vis international banks who have been here for much longer?
The international banks you are referring to play a very important role in the markets they are in.
But investment banks such as UBS have also got to play a role due to our expertise in global capital markets, industry knowledge, global reach of distribution channels and advisory expertise. We are not bringing American or European bankers here. We have got our local team. We can create a fantastic blend of local and international knowledge and expertise.
Possibly, we can offer more value-added services to big companies or big deals. Regional and small companies need service from local players.