Investment banking alliances

In this article we are highlighting case of Morgan and Kampani’s JM about their strategic and may be timely breaking of their alliance in the investment banking field.

American giant Morgan Stanley has ended its decade old partnership with its Indian alliance partner to strike out on its own in the rapidly growing Indian financial services industry.

Investment banking alliances are not made in heaven and don’t last a lifetime. With JM and Morgan announcing their split, this is the third in the list of announced deals following Kotak Goldman and DSP Merrill splits last year. No one’s complaining though, for JM the acquisition value gives them enough capital to branch out on their own.

Morgan will really enjoy the operational flexibility that the deal brings to them. The surging capital markets have also ensured that business growth is rising faster than the competition. This has kept bottom lines healthy and kept adverse competition at bay.

With the business being equally split, both would have their jobs cut out to roll out and build scale, and bridge gaps. Both the securities and advisory business are important components to building a full-scale investment bank.

Both tend to complement each other with securities bringing the investors and advisory bringing the relationships. JM would need to build the distribution component, including the institutional sales, research and trading.

While Morgan Stanley would need to put in place a team that would bring relationships and mandates to be executed. The task seems to be tougher for JM with regards to global clients.

The institutional securities business has been tougher for Indian players as overseas clients are comfortable dealing with their international banks that serve them across markets. Morgan would also miss on the rapport that JM and its bankers enjoy with Indian promoters.

Morgan Stanley is paying $445 million or nearly Rs 2000 crore to take control of the JV’s institutional broking business. Morgan will sell its holding in the other ventures that include investment banking and wealth management for $20 million of Rs 88 crore to JM Financial.

Indian broking firms earn about Rs 2300-2500 crore revenues from institutional business alone. This business is also growing at rapid clip, making it attractive to foreign brokers who also enjoy relationships with overseas investors who are pouring money into Indian shares.

After the break-up, Kampani will have full control of JM Morgan Stanley Ltd, the company that offers investment banking, wealth management, advisory, fixed income services. This part of the business contributed about 45% of the total profit of the two JVs for which Kampani is paying $20 million to Morgan Stanley.

Morgan Stanley will gain control of JM Morgan Stanley Securities, the entity that handles broking and research for FIIs, MFs and insurance companies. This business contributed 55% of the profits and Kampani is getting nearly Rs 2,000 crore for giving up his interest. The deal may be completed shortly.

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