In the exchange listing process as an exit route, issuers must negotiate with angel investors, anchor investors and underwriters. Funding such transactions could pose risks for banks, as their valuation methods may differ from PE’s ‘hybrid valuation models’. When a prospective buyer is interested in acquiring a controlling stake in a company from a PE investor, banks may face challenges because of the hyper-valuation that PEs always quote.
It is late, but still not too late, thanks to active efforts by banks like the State Bank of India. The Indian commercial banks are poised to benefit from the lucrative lending market as the Reserve Bank of India (RBI) has opened up multi-trillion-rupee merger and acquisition (M&A) opportunities. This move adds to the pool of liquidity for corporate deals and increases competition for non-banking lenders. Until now, the vast Indian M&A market has been dominated by non-banking financial companies (NBFCs), private credit funds, foreign banks, mutual funds (MFs), and foreign portfolio investors (FPIs), while commercial banks have been barred from participating in it.
The entry of banks will drastically cut the cost of M&A funding. Still, many things remain unclear. Let’s wait for the framework to develop and see how well banks can use the ₹4.50 trillion M&A market opportunities, which are growing rapidly. But it is not an easy market for big deals if the exposure is limited. Even a large bank like the State Bank of India may face challenges in funding big-ticket M&As on its own due to exposure norms. Banks may form a consortium or lend against listed debt securities to meet the demands. The RBI has decided to remove regulatory ceilings on loans against listed debt securities. These options allow banks to participate in larger deals. Still, it is too early to say how things will unfold.
With firsthand experience of mergers within them, large Indian banks possess authoritative knowledge of M&A and post-merger integration challenges. Banks have gained insights into corporate finance through their lending and recovery experiences. They have learned about the dynamics of both large and small businesses, as well as various industries, including their successes, failures, vulnerabilities, management quality, fund flow, and financial discipline.
Typically, two companies merge to expand the market share, achieve scalability, and boost productivity by reducing operational costs and increasing synergies through better utilisation of assets and infrastructure. Mergers occur after analysing various factors, including product similarity, access to new markets, potential for better alignment, and operational advantages. There may also be bigger goals for large companies acquiring smaller ones when planning inorganic growth in the market. This is often a strategy to systematically reduce future competition in a specific region or area where the acquiring company already has a presence. There are cases of overpriced deals, where banks can only consider the potential liquidation value of the combined assets. In such cases, banks also benefit from the deals. Ultimately, mergers and acquisitions boost a company’s revenue, with banks facing no big risk of losing their assets. This is one side of M&A.
The deal of acquiring stakes from private equity investors, who have invested in companies at different stages, is another side of the M&A business. Private equity firms (PEs) may opt for off-market buyers if the deals present an attractive opportunity for a quick exit, rather than going through the more complex process of exchange listing. In the exchange listing process as an exit route, issuers must negotiate with angel investors and underwriters. Funding such transactions could pose risks for banks, as their valuation methods may differ from PE’s ‘hybrid valuation models’. When a prospective buyer is interested in acquiring a controlling stake in a company from a PE investor, banks may face big challenges because of hyper-valuation that PEs are always famous for.
