BUSSINESS STRATEGY – 2

ASSIGNMENT ON AXIS – ENAM

MERGER

SUBMITTED BY:

KUNDAN MANJIANI -09BS000198.

Private sector lender Axis Bank’s subsidiary has confirmed they will be merging
with Enam Investment Broking. The Axis-Enam merger ratio is at 5.7:1. This all-
stock deal is said to be valued at around Rs 2,064 crore subject to regulatory
clearance from the Reserve Bank of India and SEBI.

The merger between Axis Bank and Enam will see the latter demerge its
investment banking subsidiary while their demerged international banking
operations will merge with Axis Bank’s arm. Manish Chokhani is touted to be the
CEO of the new buy and Vallabh Bhansali is likely to join the board of Axis Bank,
subject to approvals.

Enam promoters will get a 3.7% stake in the bank as a consideration. Jagdish
Master will join the board of the new subsidiary and will get share consideration of
approximately Rs 330 crore. Manish Chokhani is to get a share consideration of
approximately Rs 168 crore.

The Deal

 ENAM's broking, I-Banking, financial products distribution and advisory

businesses based in India as well as abroad to be merged with Axis Bank's
wholly owned subsidiary Axis Securities & Sales Limited;

 Axis Bank to de-merge its I-Banking unit and merge with this wholly owned
subsidiary.
Features of the deal

 All-stock deal;
 Vallabh Bhansali (Promoter, ENAM) to join Axis Bank's board;
 Manish Chokhani (Promoter, ENAM) to be MD & CEO of the merged
entity;
 Jagdish Master (Promoter, ENAM) to join the board of the merger entity;
 Non-compete agreement binding ENAM not to enter divested businesses for
a period of 5-years;
 Senior executives from ENAM to stay on for at least 2-years to develop the
I-Banking business.

Benefits

To Axis Bank

 ENAM's excellent I-Banking business (ECM);

 ENAM's strong retail and institutional broking business;
 Senior executives from ENAM to stay on for at least 2-years to develop the
I-Banking business;
 Axis to retain the ENAM brand for 2 years;
 Absence of significant overlapping businesses;
 Axis to leverage on ENAM's large client base to cross-sell banking products
& services.
 Similarly, Axis Bank to also benefit from its large branch network to cross-
sell products & services from the broking & distribution business.
Valuation

 Axis to issue 13,782,600 shares (3.3% of enlarged share capital of

Axis) in exchange of ENAM's 2,418,000 shares resulting in a share
ratio of 5.7 shares of Axis Bank for every 1 share of ENAM;
 The given ratio valued ENAM at INR 8379 per share, valuing the
total deal at approximately INR 20.26 bn at Axis Bank's CMP of
INR 1469 per share.
Risk Factors

Performance of ENAM's I-Banking business is largely contingent upon retention

of key personnel. Although, three out of the ENAM Securities' four promoters will
be joining Axis Bank or its subsidiaries and have agreed to stay for a minimum
period of two years, loss of key talent would result in lower than anticipated
performance;

In the wake of declining margins in the broking business due to intense

competition and change in product mix (higher proportion of low-margin
derivatives volumes), it will be difficult to sustain the robust historical
performance of ENAM's broking and I-Banking business. I-Banking business is
facing severe competition with commission & fees dipping to miniscule levels as
was evident during the recent PSU disinvestment programme and FPOs.
CHALLENGES
 The answer came from Vallabh Bhanshali, chairman, Enam Securities, who
sought to stress on the human integration. “

The prospect of merging with an Indian bank with a corporate culture much
like ours, along with having a value-oriented business driven by delivery and
not marketing made Axis Bank a perfect fit for us,” he said.
 Human resources experts say that there can be other challenges to a merger
of this kind where a smaller entity is acquired by a larger firm. “A lot of
people, especially in sectors such as investment banking, move from big
companies to boutique firms to get a higher position.” In such cases, the
acquirer has to take special care to pay attention to such employees and
address their needs,” says Shiv Agrawal, CEO, ABC Consultants . Apart
from issues on the people front, there can be client-related problems as well.
 “There is apprehension among Enam clients as to whether they will be as
well serviced by a bigger entity. The key here is communication ,” Agarwal
added.
 K Sudarshan, managing partner, EMA Partners, feels there are challenges
ahead for both on the integration front. “The biggest challenge for Axis
Bank will be to transform individual relationships brought in by Enam and
institutionalize them like a Goldman Sachs or a Deutsche Bank does. The
idea is that people can move on but businesses should stay,” he said.
Conclusion

 Although the deal looks expensive at 20 times forward P/E compared to the
peer group valuation, Axis has paid a premium for taking control and the
robust I-Banking business model of ENAM.

 The deal will put Axis Bank in the top league of Book Runners & Lead
Managers (BRLMs) and at the same time provide a large and ready base of
Institutional and Retail broking clients.

 We expect marginal EPS dilution for Axis Bank in the short term.

 We continue to maintain a BUY on Axis Bank with a potential target price

of INR1685 per share.