Market gives thumbs down to Axis Bank's macho move to buy Enam

Investors sell Axis Bank shares, the day after it announced the acquisition of Enam’s businesses. This is because commercial banks have a horrible post-takeover record of running investment banks

The market has given a thumbs down to the Axis takeover of the high-profile but intensely private companies of Enam. This is not surprising. Moneylife had written yesterday that the deal would not be great for Axis shareholders. We interpreted the deal as a sweet exit deal for street-smart Enam promoters.

Today, the Axis Bank stock opened at a high of Rs1,499, which was up Rs33 from the previous close. However, massive selling soon afterwards took the stock down sharply to Rs1,389. By the end of the day, the stock was down by almost 3%. Clearly, the market is unconvinced by the elaborate arguments of Shikha Sharma of Axis and Vallabh Bhanshali of Enam in favour of the deal.

Yesterday, Axis Bank announced it would merge Enam's institutional broking and investment banking businesses into an Axis subsidiary and that it would issue Rs2,064 crores worth of Axis Bank shares for the deal. We interpreted this as a bad purchase for Axis because Enam's brand name is not institutional. It has value only if the original promoters are driving the business.

According to Ms Shikha Sharma, managing director and CEO of Axis Bank, the transaction takes into account revenue and intangible assets such as people, brand, business relationships and the business model. Unfortunately, all intangible assets in this case have no long-term value. It is only the Enam revenues that will last for sometime and then dwindle. Hedge fund managers have an interest in dealing through Enam as a broker and not through the desk of just another bank. Clients are not drawn to Enam for its institutional expertise or the brand name per se, but mainly for the personal expertise of its promoters who have shown exceptional acumen in understanding Indian companies and markets. We were skeptical whether businessmen, who value the individual wisdom of Enam promoters, would now seek this through Axis. The market seems to agree with us for now.

Another reason investors are hardly convinced about the deal is because there is simply no fit between professionally-run Axis and Enam, which is almost like a medium-sized partnership firm. To paper over this gap, both Shikha Sharma and Vallabh Bhanshali waxed eloquent about a "strong cultural fit between the two organizations". This is bunkum. There is no cultural fit at all.

Axis Bank, formerly UTI Bank, is hardly more than a decade old. It had massive losses, a poor work culture and indifferent ownership and control until Dr PJ Nayak stepped in. Dr Nayak built the bank to its present shape with a leadership that is very highly regarded. His period was marked by the development of a customer-focused retail banking culture. What has that got to do with the cut, thrust and sharp practices of a secretive investment bank?

Now look at the current leadership of the bank. Shikha Sharma is barely a year into her job as CEO. There have been departures and fresh hiring which has changed the bank culture, insiders say. Indeed, there are murmurs that the culture at Axis Bank is changing, to what ICICI Bank was, until 2007, even as ICICI Bank has turned more cautious in its approach. So, Axis is now trying to find its own "culture" under the new CEO. On the other hand, with the original promoters no longer calling the shots, Enam's culture will disappear like the morning mist, inside Axis. With a poor cultural fit and a host of intangible assets that have no value, institutional investors don't see much to get excited about this deal.

This is not a surprise. The acquisition of investment banking firms and hedge funds by large commercial banks does make headlines and they've been quite a macho thing to do on Wall Street for many decades. They have enriched the dealmakers, CEOs and others, but have not created much shareholder value, thanks to differences in culture and motivation.

In September 2008, The Economist magazine wrote: "Commercial bank takeovers of investment banks have a horrible history because of the stark cultural differences." The reason is that commercial banks have lower risk tolerance than investment banks. Very simply, default is a prime consideration for commercial banks, but that's not so for deal-driven investment banks. Investment banks help companies raise capital and they advise on takeovers. For this they earn fees and the success or failure of these companies is not a large concern.  Commercial banks, on the other hand, are more risk averse.  They are greatly concerned about default risk since their core business is accepting deposits and making loans. They will only make a profit if the borrowing corporations repay. Therefore, the risk tolerance of these banks will be different from that of investment banks.

The merger of JP Morgan and Chase Manhattan Bank in late 2000 illustrates how risk and cultural differences play out. The merger was widely touted as a great fit. Over the next three years the stock price lost over a third of its value, 10,000 people were laid off, and the company was able to post only one quarter of positive earnings. Similarly, in 1982, American Express bought Lehman Brothers, one of Wall Street's leading investment banks and merged into the Shearson brokerage unit it acquired the year before. But after years of losses that cut deeply into American Express earnings, the group was split up and eventually Lehman was spun off and listed again. There are scores of such failures. Indeed, there is hardly any example of a successful takeover of an investment bank by a commercial bank, without substantial slash and burn.

1 decade ago
ENAM get 3.8% of Axis shares as part of this deal . Market sources are talking that ENAM though its group companies and investors , it can significantly influence, hold another 15%. The combination of the two at nearly 18% of Axis equity is just below 20% that SUTI holds in Axis .
With RBI contemplating permitting entities to hold more than 10% stake in a bank and SUTI disinvestng in Axis the stage will be set up fr ENAM and its associates to make a play for Axis .
And what a catch .I would buy ENAM shares if they were listed.
I visualise another rebranding in store for Axis Bank. Any bets it will be rebranded ENAM Bank a few years down the line ?
All this while the Board sleeps and the CEO goes for individual glory . Sad day for those who toiled to build Axis .
Replied to jacob comment 1 decade ago
Moneylife team needs to dig around and see if there is insider angle to the deal . a simple fact to check if any of the directors of Axis are using the portfolia management services of ENAM .
Sharp journalist owe it to the investors to check the underside of the deal before regulatory approvals are given .
1 decade ago
Considering that the promoters of ENAM have been paid only by shares of Axis Bank and since for a while some of them will be involved with running the Bank/ENAM part of the business, isn't it fair to assume that they will work to ensure that for atleast a year or two the price of Axis bank share will stabilize or rise for them to exit with their gains of the deal?
Replied to SANarayan comment 1 decade ago
Even if the Axis share price does not increase, ENAM is at receiving end, as ENAM is just sacrifing its present annual income of 70 crores against Axis Bank share worth Rs 2000 cores, which ENAM knows that they will not be able generate in next 5 years.

But one thing is sure, Axis Bank will get one more opportunity to manipulate its books and show rosy picture to its investors for which they are known for, due to increasing pressure on its fee income and NPA
1 decade ago
The CEO at Axis is driven by two motivations :
1) A deep sense of hurt and humiliation at having lost out to Chanda Kochar at ICICI Bank .
2) Desparately trying to prove that she is better than Nayak at Axis Bank.
Her on personal style is hands off ,not getting deeply involved in the functioning of the Bank . She only looks at stategy and the macro picture . This peculiar combination of motivations and management style only leaves M&A activity where she can make her mark .
she is very particular about her media image , and much more sucessful in building her image,then the organization she works for.All the press reports dwelt more on her education &career history with little on track record of Ais as an institution.
Diffcult days for Axis .
Replied to guest comment 1 decade ago
How the Board of Directors has selected her? Is it not the time to check the track record of BoD?

The picture is clear now that Dr. Nayak's proposal to nominate Mr. Hemant Kaul was the right choice as successor and it proves that BoD has failed to understand Dr. Nayak even after working closely with him for last 10 years

Its time now that BoD should give a serious thought and spare some time in guiding the New CEO in day to day functioning and decision making as most of the old staff who have built the empire under Dr. Nayaks leadership are saying good by to new managements style of functioning.
Replied to BEIP FORUM comment 1 decade ago
The Drectors on Axs include Directors on the Board of Subishka . What further track record you want to be checked.
The same Board okayed the sweet heart settlement with Rajshree Sugars where Axis was made to give up its legtimate dues . Dues that Rajshree had not got through the courts was facilitated and steered by the board .
Replied to guest comment 1 decade ago
If the Board of Directors lack basic principal of accountability, then what the organization can expect from the employees?
R Balakrishnan
1 decade ago
All is NOT well at Axis Bank. Anyway, not much harm because payment is with overvalued stock. So, not fair to put a number to this deal. Enam has obviously got a good deal, because a family shop has been sold for a small stake in an institutionalised business.
Partha Choudhury
1 decade ago
First to report contrary opinion,great.
Other points like overpaying with shares and not including biz makes it look superexpensive
k a prasanna
1 decade ago
Foolish decision by Axis bank. Costly deal for Axis. By investing by just 5% of the deal amount, Axis could have created a strong investment and broking team within the bank itself. Bonanza for Enam share holders. Similar to winning a billion dollar lottery and without tax liability.
Replied to k a prasanna comment 1 decade ago
If Kotak Bank being the last entrant in the Banking Sector can capture the sizeable share in the market with their in house team of Investment Banking, then why not Axis? Why they should dilute the equity worth 2064 Crores to ENAM? Enam ke saath aisa kya insider trading hai? Whether the bank will be able to earn 2064 crores in next three years of Ms. Shikha’s left out tenure or after that with the present rate of ENAMs Profit of 92 crores for FY 2009-10. Is it a short term story to inflate the profit on the advise of foreign consultants, as the bank profitability is under tremendous pressure

Is Axis Bank facing a liquidity problem due to non performing assets ? including 1200 crores standalone exposure to Micro Finance.

All is not well with Axis and hence they want to divert the mind of the investors
1 decade ago
Good analysis by Mr.Basu. It appears that Ms.Sharma is only driven by enhancing the stock price/ market cap by doing such deals. After all, she might need to face the board in the next 1 - 2 years, who'll ask what has she done to enhance "share holder" value.

We saw the same thing at the time of the Axis - Max Newyork deal. Alas, our bankers seem to be aping the west in putting the stock interest above the organisation/ people.

Smart deal for Enam, now they'll be able to access the Axis balance sheet for promoter funding/ marging funding etc.

This is "growth at any cost" ala ICICI Bank a few years ago. Ms.Sharma's stint in ICICI Pru Life is well known.... years of losses !

Hope Axis does not turn out to be deja vu......
Replied to investor comment 1 decade ago
Axis Bank Board of Directors and the Company Secretary don’t have courtesy to respond to the shareholders letter please click on the link below

They all are mum because they have accepted the inside story which is similar to Hyderabad based Satyam and Global Trust Bank.

You will be shocked to know that CFOs son is working for Ernst & Young who are the statutory auditors of Axis Bank, which is a gross violation of code of conduct of Institute of Chartered Accountants of India and Axis Banks HR Policy, but the bank is re-appointing them every time as the auditors in order to manipulate the books of accounts at every quarter end and I request the RBI & Finance ministry that the Private banks should be brought under the purview of CAG, CVC and RTI

Brother in law / sister in law, brothers & sisters, son & daughter, son in law and daughter in law, husband & wife, nephew & niece and other close relatives of Deputy Managing Director, Executive Directors, Presidents and SVPs are working in Axis Bank at very senior positions in cool cabins of Central Office & Zonal Office and they get highest increment and functional pay, assured promotion without any contributions because their uncle / parents / father in law is their to take good care of them and they refuse to work in branches, because they know that they have to slog. But for other employees the management make the life miserable and that is why the employees have lost the faith in top management and hence they are quitting axis.

Issued in Investors Interest By
1 decade ago
Dr. P J Nayak believed in Organic Growth and delivered good results, where as Ms. Shikha Sharma is in volcanic situation and wants to show the growing numbers by hook or crook and she is taking Axis Bank investors for a ride through Marine Drive via BSE and BKC via ICICI & NSE.

Bhansalis ( including CRB ) are the master mind professionals and known for making money, and its a win win situations for ENAM promoters and not for its employees, whereas Axis Bank who is having lack of skilled management talents are the losers and instead of going with ENAM they could very well adopted Dr. P J Nayaks strategy of organic growth by hiring top professionals from IB by paying 2 to 5 crores salary, instead of shelling out 2067 crores, I agree Ms. Shikha’s timing is not correct as investment banking sector is in bad shape and hence the deal is the biggest blunder.

Besides this Axis Bank is also highly exposed with more than 1300 cores exposure to Micro Finance Institution including SKS, which will affect the Axis Bank badly.

With NEW CEO its already on the verge of becoming another ICICI Bank as it was 2 years back and now they started image rebuilding exercise by spending crores of rupees on TV commercial especially on Amitabh Bachchans show Kaun Banega Crorepati which is one of the costliest time slot with Associate sponsorships at Rs 8 crore plus 10-second spots at Rs 1.2-1.75 lakh and the bank is spending more than 15 cores at whose cost? Naturally investors / depositors and hence RBI should restrict / put limits on commercial advertisement expenditure made by the banks.

Issued in Public Interest
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