JM Morgan Stanley dissolves and ends an era of India JVs

Morgan Stanley pays $425 million for its India institutional equities sales, trading and research platform and will build investment banking, capital markets and wealth management businesses.
According to a statement released Thursday, leading Indian investment bank, JM Morgan Stanley, will be dissolved. The investment bank, which was formed in 1999, was the only one still standing in what was once a troika of investment banking joint ventures.

In the deal, JM Financial will pay $20 million to buy out Morgan StanleyÆs stake in the investment banking, fixed income and retail operations of the venture. Morgan Stanley, meanwhile, will take full ownership of institutional equities sales, trading and research for $445 million. Morgan Stanley will add this business to its wholly owned investment management and real estate businesses and will build from scratch investment banking, capital markets, fixed income and private wealth management.

JM Morgan Stanley brought together Nimesh KampaniÆs JM Financial Services and Morgan Stanley, with the Indian partner owning 51%. Sources close to the deal say that Morgan Stanley's decision to opt out of the JV structure once again points to how important India coverage has become to the strategies of global investment banks. The country is now critical enough to warrant 100% ownership.

The other trend the deal captures is how the investment banking landscape has changed worldwide from a purely advisory platform to increasingly a platform where investment banks win mandates by putting capital to work for clients. For example, India has seen a spate of cross-border M&A deals and Indian acquirers choose advisors who can provide not only advice but also funding. In such situations, the strategy of a global investment bank with a large balance sheet that can be leveraged for the benefit of its client, may diverge from that of a smaller, local partner.

Hans Schuettler, CEO of Morgan Stanley Asia, says: ôIt is now the right time for Morgan Stanley to develop a wholly owned full service India platform. This investment demonstrates our commitment and confidence in India, the growth of the market and the fast changing needs of our clients.ö

Observers say the writing was on the wall for the joint venture for a while.

KampaniÆs son, Vishal, who has worked alongside his father for more then 10 years, currently heads corporate finance at the JV. Those in the know say that he sees himself as a natural successor to his father who is widely perceived as a deal rainmaker. Vishal's ambitions span the gamut of financial services businesses and JM Financial has been busy of late creating an independent presence in new areas. It has partnered with a group of erstwhile Morgan Stanley employees who set up a private equity fund, Old Lane. Distressed debt, real estate funding and mezzanine financing are other areas of focus with a stated intention to deploy up to $1 billion in alternative assets.

For its part, Morgan Stanley has been sharpening its focus on a country which is yielding opportunities in a number of high-return areas. Recently, Morgan Stanley's special situations unit placed its largest bet in the real-estate sector globally thus far, investing $152 million for a 10% stake in IndiaÆs Oberoi Constructions. Multi-billion dollar deals like this are widely expected to drive business in the future. And investment banks which put capital at risk don't want to have to share the potential upside with a partner who is not sharing the risk.

The division of the spoils in the dissolution of JM Morgan Stanley also reflects the strengths of the partners in the existing show. KampaniÆs relationships have been built up over decades as he has helped Indian corporates grow from fledgling businesses to globally ranked giants. For its part, Morgan Stanley created the institutional equities business and has been instrumental in winning mandates on the back of this platform. On the investment banking side, Morgan Stanley has a number of bankers based offshore covering India. It will grow its onshore coverage as well as fixed income and wealth management to replicate its global model.

A look at the growth of India's investment banking market in the last two decades puts things in context. In the 1980s the Indian economy was still highly regulated. In the 1990s this changed but revenue opportunities from India were still small. At that time, for most global players, a partnership with a local firm seemed like a good ôhedge your betsö strategy û have a presence on the ground but limit the time and resources invested.

Those days are long gone. Cross border M&A, international fund raising, private equity, distressed debt are now buzzwords. Indian companies pay top dollar to get the right advice û and advisor. India is flavour of the month; this has translated into international clients of the investment banks seeking to deploy capital there û and increasingly, principal investing arms of the investment banks are themselves busy chasing opportunities.

The JM Morgan Stanley split follows that of Merrill Lynch with Indian partner Hemendra Kothari in DSP Merrill Lynch (DSPML) in December, 2005, 10 years after it was created. In that instance, the US investment bank paid $500 million to acquire Kothari's 50% interest in DSP Merrill Lynch (and minority shareholders who held 2.27%). Kothari continues to own 10% in DSPML and as part of the deal also acquired majority ownership in DSPML's mutual fund subsidiary. It is speculated that Kothari was paid substantially for a non-compete he agreed.

Then in March 2006, Uday Kotak turned the tables buying out Goldman Sachs 25% ownership in its investment banking and securities joint ventures for an aggregate $75 million.

And now Morgan Stanley has paid Nimesh Kampani a net $425 million for one part of their joint venture's business.

The three transactions and the considerations are not comparable because in no instance is the underlying asset the same. Further, each investment bank has adopted a different - and situation-specific - strategy post-split. Merrill Lynch is strengthening the existing DSPML and faces no competition from erstwhile partner Kothari, who continues as chairman. Goldman Sachs is primarily focused on principal investing. And Morgan Stanley - which intends to replicate the full-service investment bank structure with which it operates elsewhere in the world - will face competition from its erstwhile partner from day one.

But the deals, which are structured very differently, do all point to the same thing. India has finally taken its place in the global investment banking arena. Investment banks are striking deals at high prices because they believe the future cash flows they earn will more then justify what they are investing today.

And, in an interesting corollary, the ones who seem set to continue to reap the rewards are bankers with India expertise and experience. All investment banks are having a hard time finding and retaining talent. And this seems set to only become more difficult as the JM Morgan Stanley split creates two more entities who will be hiring to fill gaps in their ranks.
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