American investment banks are brokering billions of dollars worth of deals in the Indian tech sector. By Michael Megarit
India is a battleground for American tech companies looking for growth opportunities.
With more than 560 million active Internet users and an equal number expected to connect over the course of the decade, India’s technology industry is booming: e-commerce, content streaming, messaging and digital payments are among the fastest growing and most lucrative emerging sectors.
India’s government and business community are well aware of their nation’s economic potential and their courtship of international capital is turning the country into one of the most attractive investment destinations in the world.
Mukesh Ambani, the billionaire founder of Reliance Industries, one of India’s most valuable conglomerates, is at the forefront of fundraising efforts. In 2020, he convinced Facebook, Google and Silver Lake Partners to invest $15 billion in Jio Platforms, his flagship technology venture.
These three deals helped propel India to the top of the M&A rankings in the Asia-Pacific region: in 2020, the country accounted for 12% of all dealmaking activity in the region, the highest percentage since the late 1990s.
In fact, total dealmaking in India rose to $55 billion in 2020, an 18% increase over 2019.
India is the Next Tech Frontier
American corporations are well aware that an interconnected and globalized economy favors the emergence of mega companies. A few decades ago, start-ups were limited by their regional or national boundaries. Today, technology companies can reach customers across the entire world.
And India is a world in itself.
With 1.3 billion inhabitants – most of who are destined to become middle class by 2030 – India has a large technology gap to fill.
Not only are Indian start-ups working to satisfy the growing needs, American companies are eager to provide the necessary capital to help them grow and scale.
In 2020, the US was the most active foreign acquirer of Indian businesses in terms of value as well as number of acquisitions. Indeed, US companies brokered 147 deals worth a combined $19.1 billion, which represented more than half of all M&A activity in India.
Key deals of 2020 included Facebook $5.7 billion and Google’s $4.5 billion investments for a respective 9.9% and a 7.73% stake in Jio Platforms, Mukesh Ambani’s high-growth tech venture. Intel followed suit and invested $250 million for a 0.39% stake in Jio.
And that’s just the tip of the iceberg.
Unicorns Exist – They are Multiplying in India
Since the beginning of 2021, India witnessed the emergence of a record-breaking 25 start-ups valued at over $1 billion. In total, there are 61 unicorn start-ups in India – and this number is expected to rise in the coming years as the internet penetration rate increases.
This is not surprising, as investors pumped more than $40 billion worth of capital to broker over 800 deals.
Even less surprising is that most of these new unicorns are technology companies.
Indeed, several of the 800 deals led to the creation of new technology unicorns:
- Grofers, an online grocery delivery platform, became a unicorn following a $120 million fundraising effort led by US investment firm Tiger Global.
- Edtech startup Eruditus joined the unicorn club after raising $650 million with help from American venture capital firm Accel US.
- CoinDCX, a cryptocurrency exchange platform, raised $90 million from investors thanks to fundraising efforts led by US private equity firm B Capital Group and US companies Coinbase and Polychain Capital.
Since American venture capital and private equity firms are heavily involved in fundraising and dealmaking, it is expected that American investment banks are also participating in the flurry of dealmaking by facilitating investments and buyouts.
American Investment Banks are Heavily Involved in Indian Dealmaking
All investment banks are profiting from the rise in Indian dealmaking activity.
In 2020, Indian investment banking activities hit a three-year high, with total generated fees exceeding $1 billion.
However, just 5 American investment banks are generating nearly 25% of that total amount.
Morgan Stanley, Goldman Sachs, JPMorgan Chase, Bank of America and Citigroup are among the top 20 investment banking fee earners in India in 2020 – with Morgan Stanley capturing a whopping 10% of all revenues generated by the industry. Only ICICI Bank, India’s second largest bank after the State Bank of India, generated more fees.
American Banks and Covid-19
The pandemic is exerting tremendous pressure on fragile sectors of the Indian economy.
The most eloquent example is the long-suffering financial sector. Indian banks are under increasing pressure to raise capital and consolidate in order to survive and compete with foreign banks.
For US investment banks, this is the perfect time to flex their financial muscle and expertise.
In July, Citigroup hired a leading executive from Asean bank CIMB to head its technology, media and telecommunications investment banking for the Asean region. Citigroup is well aware that the Asian continent, and India in particular, is home to some of the fastest growing technology companies in the world and it has every intention to be a prominent M&A advisor.
Other American banks are following suit and strengthening their Asian divisions in order to compete and dominate the industry.
And the strategy is working: Goldman Sachs, Morgan Stanley, JPMorgan and Bank of America are among the top 5 foreign banks generating the most fees in Asia.
American Banks are Enacting Aggressive Growth Strategies
Advisory fees make up a small percentage of the big American banks’ revenues.
However, the banks know that cash-rich private equity firms are eager to buy promising companies. They also know that M&A advisory is an important source of prestige and, more importantly, it is potentially very profitable.
Indeed, investment banking divisions can generate substantial profits by winning billion-dollar mandates. Since M&A requires no outlay of capital – other than human resources – advising large M&A deals can produce significant Returns on Equity.
In addition, M&A drives activity in other areas: advising on mergers can lead to winning mandates on stock or debt offerings to finance those deals; and it attract clients to the banks’ hedging, derivatives and financing services.
Thus, by brokering technology deals, the banks are setting themselves up for long-term success with both the acquirer and the acquired entity. Both parties will require banking, investing, lending and insurance services in the future.
Who will these organizations turn to if not the institution that facilitated the billion-dollar deal?
The Banks are Prepared for Business Post-Covid
The American investment banks are aggressively preparing for the gradual return to normalcy as the world economy comes to grips with Covid.
M&A only requires human capital and personalized customer service. Thus, the banks are mandating their staff return to their offices:
- JPMorgan requested that its employees return to their offices by July 6th.
- Goldman Sachs asked employees to return by July 14th.
- Morgan Stanley welcomed its employees back on Labor Day.
This proactive attitude is giving the American banks a definite advantage over its Indian and international competitors. Indeed, they are adopting a more cautious “wait and see” approach, which could ultimately hurt them.
In the long run, these various strategies will end up generating significant business for American investment banks in India.
About the Author
Michael Megarit is a partner with Cebron Group. With over 25 years of domestic and international corporate finance experience, he provides M&A and capital advisory to high-growth technology companies.