IDFC Bank chairman Rajiv Lall (second from left), Piramal Group chairman Ajay Piramal (second from right) and Shriram Group founder R Thyagarajan (first on right)

Valuation Wasn’t The Only Hurdle For IDFC Deal, Says Shriram Group Founder

Disagreement over valuations was not the only roadblock to the planned merger between IDFC and Shriram Groups, R Thyagarajan, founder, Shriram Group, told BloombergQuint in an interview.

IDFC Ltd and Shriram Group yesterday called off the merger talks citing failure to agree on a share swap ratio. In July, the two groups had entered into exclusive talks for a deal termed as a “marriage made in heaven” by Rajiv Lall, CEO of IDFC Bank Ltd.

“To say that because the valuations expectations have not been met on either side, the deal is not going through, is an over simplification,” Thyagarajan said. Merging the respective strengths of executives from both the parties would have posed a challenge too, given the time frame of 2-3 months, he added.

Here’s an edited excerpt of the interview:

Why did the deal fall through?

Normally, deals take their own time to go through. What we have said is this will not go through within the timeframe that we thought. Initially, some exclusivity period was agreed upon. Exclusivity period means during that period we don’t talk to anybody else. Within the exclusivity period, if a deal has to be struck, then that would have been a very unusual and improbable event.

No deal of this kind of wide ranging complexity can be completed in 2-3 months’ time. But somehow an impression was created that everybody attempted to complete a deal within this period. It won’t have happened. To me, it is not surprising that we did not complete a deal within this time. So, this doesn’t mean that the deal will not take place. At some point of time in future, it can take place.

So you are saying that the deal is not entirely off the table?

The point is, even in the next 8-10 days, we do not see the possibility of reaching an agreement on a wide range of issues and that does not entail only the valuations. For any deal between two entities, one of which has 50,000 employees’ strength, there are so many details which have to be agreed upon.

One of the reasons  is valuations. The second is the objective that we have. We need to have an agreement on the objective which we hope to achieve by working together. And then the quantification of the objective – what will be the value creation. Thereafter, the teams and the managements have to implement that merger. The integration problems have to be addressed. Only if we reach an agreement on all of them, people are expected to go forward.

Some of us within the Shriram Group did not expect that the deal will be struck within the time frame. We agreed upon exclusivity, that we will not talk with anybody else in the meantime.

Where do things stand as of now? Are you willing to consider a better offer from the IDFC Group? Are you talking to others?

Everybody is only focusing on the valuations. It is one of the important issues. There are other 3-4 important issues, and there has to has to be agreement between the parties on all these issues. Suppose we have agreed on valuations, which is a minor issue, there are other issues on which we could have differences on. Then also, the deal could not have taken place.

To say that because the valuation expectations have not been met on either side, the deal is not going through, is an over simplification. It is not the case. 

Even if you have agreed then that doesn’t mean that the deal would have gone through. There are other issues on which we have started talking.

What are the other issues?

The most important thing is how much value would be created for shareholders if a merger of this kind takes place. On that, there has to be an agreement.

Our estimation of the benefit for the shareholders of both the enterprises would have been a value creation of at least Rs 10,000-15,000 crore. IDFC’s shareholders and team management would have to see the logic behind our expectation, and feel satisfied that it is workable. So, there is need for an agreement.

Only in this context, you will be looking at today’s valuations. Suppose you find that the valuations are not attractive for IDFC. Then they should look at what shareholders will get in the period of two years. If that is substantially attractive, then you wouldn’t mind giving up something here. So, there has to be an agreement on what could be the value creation that will take place because of the merger.

Then who is going to implement it? We have executives and employees on our side. IDFC has got executives, they have got strengths in many areas. Our people have strengths. We have to see that how these strengths could be merged in such a manner that the idea that we have in terms of implementing value creation will take place. Again, there has to be discussion, there has to be an agreement on it too.

Finally, we go to the regulators. They should feel comfortable. Once the regulator puts its own condition, then we have to see if it is appealing to our people and whether they can put up with it. So, there are many stages through which we have to pass before the merger could take place.

To your mind, can any of these gaps be bridged? What is the probability of the deal  going through, 10-20 percent?

Originally when people asked me, I said that the probability of something happening is 25 percent. I stick to that estimation. So I don’t feel that anything has happened today to reduce the probability. Because probability means there is an uncertainty.

Are you talking to other people for potential deals as well?

No, we are certainly not. Because the exclusivity period is over, it doesn’t mean that we will start talking to all sorts of people around. Prior to this coming on to the table, we did not talk to anybody. So, we are not going to talk with anyone else. It is not timebound. We are not saying that we should do something in the next 3-6 months. There was an opportunity which came along. So we looked at it seriously. That’s about it.

Will you make a counter-offer that is acceptable to you? IDFC said that you didn’t make a counter-offer?

No, we don’t propose to do it now. We will talk to them if they are inclined to talk to us, and then we will talk to them about other issues involved. There could be an agreement simultaneously on all the three key issues – the people issue, future valuation expectation issue and the current valuation. These three things will be taken together. If there is no agreement on any one of them, there is no deal.

Was the main issue with Shriram Transport Finance and how it was being structured into the deal?

That was an issue where we said that Shriram Transport Finance, as it was originally proposed by the investment banker and also by IDFC, that it will be completely absorbed by IDFC Ltd. They wanted a change. We said that it can be considered. There was no problem.

No decision has been taken. We were exploring what is possible for the other side and for us. It is an exploration, that’s all. In fact, the whole thing was an exploration to see that we create an enterprise which will create value for the shareholders. Simultaneously, will provide extra value to the community as well. That is what we were trying to work, and we should be working on in the future also. That is the job of a business organisation, to create more value to shareholders and community and that process is ongoing. It happens to be with IDFC now, but it could happen with some other initiatives too, but not in the form of a merger only.

It could have been about the partnership that we have stuck with Sunlam, it was not a merger but a partnership. The partnership with Ajay Piramal is again a partnership and not a merger. So, business organisations will always look at initiatives which will create value for the shareholders. A merger proposition is one such proposal.

Watch the full interview here.