Monday, November 26, 2007

Integration of ILFS Investmentsmart by Etrade

IL&FS Investsmart came into being on September 1, 1997, as a wholly owned subsidiary of Infrastructure Leasing & Financial Services. IL&FS is a leading non-banking, financial company that primarily promotes infrastructure development.

Investsmart is a financial services company engaged in intermediation of financial products and financial advisory services for retail, institutional investors, and corporates. It also forayed into merchant banking and commodity broking business, besides distribution of insurance products. Such impressive parentage helped the company in the early days to get good institutional clients. But overall the financials were not looking very attractive.

In 2,000, ORIX Corporation, an integrated financial services group based in Tokyo, picked up 27.59% stake in the company. The same year it launched its fully functional website, In January 2002, it amalgamated IL&FS Merchant Banking Services and DebtonNet India with IL&FS Investsmart.

These consolidation exercises were taken to build a strong balance sheet and to prepare itself for the future. After its public issue at Rs 125 in July 2005, the scrip is still hovering at around Rs 170-200 for the last two years. For instance in 2006-07, both its topline and bottomline took a hit in view of the stagnant growth and branch expansion exercises. It set up 37 new branches.

Revenue rose marginally by 7% from Rs 224 crore in 2005-06 to Rs 241 crore in 2006-07. Similarly, operating profit dipped to Rs 70 crore from Rs 117 crore in the previous year. But with E*Trade as its partner, the future will surely not be a mirror of the past. Already there are visible signs of change. A comparison of retail revenues for 2006-07 and the current six months, gives a clear picture of this change. These figures held the shape of things to come.

E*Trade reported net revenues of USD 2.4 billion or Rs 9,600 crore in 2006 with net income of USD 629 million or Rs 2,500 crore. It manages retail client assets worth USD 194.9 billion and customer cash and deposits at USD 33.6 billion in 2006. E*Trade has grown through the acquisitions route. It did three major acquisitions between 2005-06. So, what did a big player like E*Trade see in IL&FS?

Devinjit Singh, Head-Investment Banking, Mergers & Acquisitions India, said, ?Well in that particular case, I guess there were two or three things which E*Trade was looking to achieve. The first was to be able to acquire a business which had customers. Second, was to acquire an established platform for the distribution of its products. Third, was an access to the management that Investsmart had built. All of which probably proved appealing to E*Trade to establish and grow its business in India.?

Etrade did not suddenly acquire Investsmart. It came in when SAIF Investment Company, Mauritius, an affiliate of Soft Bank Corporation USA decided to have an Indian presence. Soft Bank was also a stakeholder in E*Trade. So, E*Trade too decided to take up 14% stake in Investsmart while SAIF took a 20% stake. That was in January 2005. In July 2005, the company came out with an IPO issue where stakes got diluted. A GDR issue closely followed this in December 2005.

After getting a taste of the Indian market for over one year, E*Trade felt it opportune to raise its stake further to 43% in March. E*Trade increased stake to 17.86% while subscribing to Investsmart?s GDR issue in December 2005, further increased stake to 37% by purchase of GDRs from the secondary market and then acquired 6% through open offer.

*(Announced a tender offer for an additional 20 percent of the shares of IL&FS Investsmart Limited, one of India's leading financial services organizations, providing a complete range of Financial Management Solutions for Retail and Institutional customers(July-September 2006)

This now makes it a core partner with IL&FS having a 29% stake. By beginning of 2006, not only did Investsmart have a strong partner in E*Trade but also oodles of cash to expand its business. Its kitty was Rs 550 crore, of this Rs 440 crore came from GDR proceeds and the balance Rs 110 crore from IPO. That money is now going to change the dynamics of the business.

Sachin Joshi, ED-Finance and Operations, IL&FS Investsmart, said, ?The purpose of having the GDR and IPO was to go in for major expansion for branches and mobilise resources which could be utilized to undertake securities and securities related financing activity. With E*Trade coming in as a strategic partner, we could also look at few acquisitions over a period of time. We mobilized about Rs 550 crore out of the IPO and GDR proceeds. Add to that our own network, today we have about Rs 750 crore of surplus cash available in the system, out of which at least Rs 650 crore could be utilized to do all these activities and change the face of the balance sheet.

Besides money muscle, Investsmart now has huge marketing and technological benefits by partnering with E*Trade. It will change the way Investsmart does business. Investsmart can now rely heavily on the expertise developed by E*Trade in developing brand architecture, marketing strategies, and tools to position the company as a dominant player in the domestic market.

More than operational expertise, what E*Trade Financial brought to the table was the experience of surviving the boom-bust cycle. This fast growing brokerage firm suffered red ink in its balance sheet in 2001, when the dotcom bubble went bust. But E*Trade survived all of that, and it bounced back with full vigour. This rich experience is what E*Trade now brings to Investsmart.

How E*Trade changed the way business was done at Investsmart?

To start with, it adopted its global policy of focused strategy and focused execution. What E*Trade brought to the table was its strategy behind providing the products. Customer service, branding, and technology all of these will give Investsmart a competitive edge.

What E*Trade brings on the customer side is focus. Till E*Trade came into the picture, Investsmart was trying to cater to all kinds of customers like low-end, middle-level, and high-end. Catering to people at all levels meant precious time spent on servicing low-end customers, thereby losing a high-end customer. Now, all of that will change.

Sandeep Presswala, ED-Retail Business, IL&FS Investsmart, said, ?One of the very important things that has happened post E*Trade coming was that they used to have a fairly defined customer focus. We have identified the mass affluent as a customer audience where we want to define all our focus and energies on. We see the segment as a fairly important segment in our scheme of things as we go forward. Looking at the growth of the service sector and looking at the growth of corporate India mass affluent, which is the most important segment in our customer segmentation strategy, is going to be the key focus area for our business going forward. Once you have a customer focus at the center of your business strategy, everything revolves around that.

But finally what matters is making the right call in a volatile and global market. That is only possible by good research back up. In a globalised India, where the economy is impacted by international events, financial research cannot be done on a standalone basis, but has to be done on a consolidated basis. Investsmart realized this two years ago.

According Sreesankar R, Head of Research, IL&FS Investsmart, they have a strong research team out here and we have created a team of around 22 people right now in India.

We have an exposure to the retail and institutional side of the market. In addition, we have an investment banking team as well, in which everything has been created over a period of 30 months.?

E*Trade follows a different business model. They do not have a research team. They outsource research and are more of an execution broker, than a full investment bank, in terms of the institutional and retail search, and investment banking activity. With our research, we will be able to give it to institutional clients of E*Trade and also offers in IPOs and various deals, that we bring about will be able to be distributed to those clients as well.

Integration of new processes in any organization takes time. E*Trade is testing Investsmart for adoption of its technology and marketing processes. Bringing about a whole mindset change is not going to be easy. How is E*Trade going to manage that?

Leslie Whiteford, MD and CEO, IL&FS Investsmart, has over 25 years of experience in the financial services sector. He comes with 18 years of experience with E*Trade?s operations. A chartered accountant by profession, Leslie brings the rich expertise of the global financial markets into the country. Having acquired several companies, he knows exactly what integration is all about. what his plans for India?

Excerpts from CNBC-TV18's interview with Leslie Whiteford:

Q: Why did you choose IL&FS?

A: When we were introduced to IL&FS, we found a company that shared some of the values that we have in our business. Basically, it is an offering to the customer of competitive priced products, with a superior level of service and traditional core values.

Q: E*Trade would also be bringing in and changing a lot of processes at Investsmart and that means a kind of mindset change. How has it been till now?

A: The one thing I found is that the management and the employees here have been very receptive to new ideas coming in, new approaches and new styles, in terms of implementing and executing it. Yes, anything new is uncomfortable. But I think they have coped very well in doing that.

I would say the main changes we are bringing in, is a greater amount of discipline around the business processes and decision-making. There are vast opportunities out there in the marketplace and it is impossible to go for every single opportunity that exists.

Similarly, in terms of technology development, you have got a limited pool of technology resources to be pulled from. You have to formally evaluate which one to do. So, rather than being driven by the emotion or whoever is the most powerful personality, to get their project done ahead of someone else?s project, we have brought in a greater discipline of evaluating what the returns are, based on some of the technology developments.

Q: Have they been fast to adapt to your kind of technology changes, has there been any kind of integration issues?

A: They have been fast to adapt and accept the vision. I think where you are taking management out of a frontline business position into more of a product development area, they feel that they have lost a little bit and have moved away from the edge.

Change is uncomfortable, but I think they all believe in the fact that this discipline does position us well for the dramatic growth that we are expected to see in the marketplace.

Q: So what are the kinds of changes that you are going to bring here to see that Investsmart also becomes a kind of a diversified financial services company?

A: Let me deal first with the online sector. I think the Indian investor is still very much in its infancy, in terms of the developments of the marketplace here. Look for the human touch, human support, human advice and the validations of what they want to do. And quite clearly that is why we have seen the broad rollout of the branch structures and the franchisees structure, that we share with many of the other participants in the marketplace.

The online space is going to come at a later point in time. So, in the interim, we can use our technology to deliver the tools to our employees in the branches, to enable them to provide better, more efficient, faster advice to the customers that they are serving.

The first space would be giving better tools to enable our relationship managers, our customer service representatives to provide the best service to the Indian investor and ultimately to allow the Indian investor to take control of a lot of these things themselves.

Q: What is the kind of branding exercise that you have planned for Investsmart? Are you going to do some name change?

A: IL&FS Investsmart is known as a financial multiplex and has multiple products within its product suite. The challenge that we face is that they were all running on separate platforms. So, it was almost like running eight separate businesses. So, if you had 1 customer who wanted say eight products, he could have eight different customer experiences. So, from our point of view, we wanted to integrate the product offering, not only in terms of the back office platforms, of bringing them together; but also in terms of front office.

The customer service representatives, the relationship manager could see on a single position all the areas that an investor and customer engaged with the firm.

So, getting that technology up and running and solid and making sure that it is scalable is where we have been focusing for the past few months and really just trying to shape our vision.

Moving on to the branding, you obviously don?t want to go in and create a brand and spend the dollars, until you feel that your infrastructure is there to support the product and service and you feel that you are marketing to your customer. So, we are just at the stage of moving into that era. I think the challenge for the marketing agencies is to take three very different brands and bringing them together, each standing for something that means something to different types of investor groups. So, we are still at the stage of formulating and how we are going to do that.

A: I wouldn?t see it so much as catching up. It is always a challenge to pick what the right time is to enter into a marketplace. If you were to consider that our main expertise is in the area of technology and online applications, compared to our peer group, we are well ahead. We are the only one of our peer group in the US, that are expanding internationally. So, that is looking it at from our peer group and the position in that space.

In terms of the Indian marketplace, there are still many foreign brokerages coming into India and increasing their stakes with partners in the Indian marketplace. We have been in for about two years. So, we are not that far behind.

We have been taking our time and making sure that we have got our positioning right. We have got our vision and our strategy right. We are all pretty firm and agreed on that space.
In November 2007 , the MD is still optimistic.

19/11/2007 interview with Leslie Whiteford Economic Times

Don’t you think E-Trade is entering the Indian market at the peak of the bull-run?

The stock market index may be near its historic high, but there is still immense growth potential in India. Retail investors have only begun to invest in equity and online trading in India is still in its infancy, compared to the US where E-Trade enjoys a leadership position and continues to grow. But there are greater growth opportunities outside the US and the decision to enter India is part of E-Trade’s international strategy to tap this opportunity. We have already obtained 17 licenses around the world and have a presence in a number of European and Asian markets. Early this year, E-Trade started operations in Dubai and Singapore and it has been in Hong Kong for a while. E-Trade is watching China, but the country has tight restrictions for foreign brokerages.

Does E-Trade wants to look at the Indian market beyond being a broking entity? Do you have any plans to set up a bank or MF or any insurance company at a later date?

Within the IL&FS Investsmart group, we already have a non-banking finance company and can offer a comprehensive financial solution to our clients. IL&FS group already offers margin-financing, loan against securities, IPO financing, loans for mutual funds and other related facilities. In the US, one of the drivers for E-Trade’s growth was the successful integration of the banking and brokerage businesses. IIL can’t bring that level of integration in India right now due to regulatory restrictions.

There are restrictions on foreigners entering the banking sector and on banks lending to the capital market, which make it challenging for IIL to fully replicate the E-Trade US model. The norms are expected to be liberalised in ’09, which will provide us an attractive opportunity.

Our business model will balance the regulatory restrictions with the needs of our customers. We don’t have any real desire to foray into the mutual fund (asset management) or insurance business beyond our existing advisory and broking business at the moment. Our focus right now is on the advisory and trading side of the business and we would rather build scale in that segment. - Form 8K of Etrade dated 18 October 2006,curpg-1.cms 19-11-2007

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