Why SBI can’t buy Citi

Why didn’t you buy Citibank when its shares were quoting at $1 during the global meltdown? This is the question former finance minister and current Union home minister P Chidambaram is reported to have popped to State Bank of India chairman OP Bhatt when Citi hit a slippery slope in 2008-09. We don’t know what answer Bhatt gave Chidambaram then. It must have been something polite and non-committal. He would, however, not have been rude enough to tell the home minister it made no sense.

Chidambaram is no stranger to business and he, of all people, should know that the real price of a share is not the rate quoted on the stock exchange, but the price plus the underlying losses of the business. With huge exposures to sub-prime mortgages and red ink all over its balance-sheet, Citi was no crown jewel at that time. In just the fourth quarter of 2008 — roughly around the time when the bank’s shares were trading at $1 — its publicly disclosed losses topped $2 a share.

State Bank would have been lucky to get out of such a deal alive. Citi’s potential losses at that point of time would have run into several billion dollars and the US taxpayer paid through his nose for it. It is doubtful if Uncle Sam would have been happy funding an India-owned Citibank when it was facing flak from Main Street for bailing out Wall Street’s fatcats. Forget State Bank, even the government of India itself — with a trillion dollar economy — would not have had the gumption to bankroll Citi. Only Chinese banks, with the backing of their government, could have attempted to buy it.

To be sure, Chidambaram himself supplied a part of the answer when he pointed out that Indian banks did not have the size or scale to take such big risks. “We are tying the Indian banking industry hand and foot. We are not letting them consolidate or grow and, as a result, we are missing huge opportunities”, he said at a function to confer an award for corporate leadership on Bhatt in New Delhi the other day.

He is only half right, though. Indian banking does need global scale and size, but that’s not enough. It does not yet have a global mindset or an adequate understanding of the skills required to make global takeovers work. Even if State Bank had the size, what value could it have brought to Citi as its new owner? Does it know the US consumer? Does it have great insights into the global financial market? Does it know how to run a diverse organisation manned by multiple nationalities? Is it even the most aggressive player in the Indian market? How is its relative success in a well-protected Indian market even relevant to rescuing Citi?

It is worth recalling recent Indian experiences in overseas takeovers. The Tatas took a decade to digest a small tea firm like Tetley. They are now struggling with two huge recent takeovers — Corus and Jaguar-Land Rover. These will take at least five more years to tame. If the Tatas had been asked by Chidambaram why they did not buy General Motors — also available for under $1 a share — they would have given him the right answer: awesome liabilities and limited competence to rescue the former No 1 carmaker.

Other Indian companies are similarly grappling for answers with their own mega acquisitions during the boom years: Dr Reddy’s with Betapharm, Suzlon with RePower, Birlas with Novelis. It will take a decade or more for most Indian businessmen to digest their big-ticket acquisitions abroad. A decade is needed not only to make the takeovers viable, but also because there are many lessons to be learnt by management. Even Infosys, one of India’s big globalisers, knows that it does not have the experience to buy and run an Accenture or EDS. This is why it is opting for smaller acquisitions and more organic growth.

Back home, where there are no cultural issues, ICICI Bank took half a decade to digest one small bank — Bank of Madura — preparatory to its own conversion from financial institution to bank. Bhatt of State Bank is having a tough time getting his own subsidiaries to merge with the mother bank — thanks to union and state government pressures.

Chidambaram’s impatience with the pace of consolidation in the Indian banking industry is understandable, but he has his own government to blame for it all. During the five-and-odd years it has been in power, and even when he was finance minister, the UPA
government did nothing to liberalise the financial sector. Not insurance, not banking, not nothing. In fact, the financial meltdown abroad has given it more reason for doing nothing, and India’s overcautious regulation now looks like a good thing. When you get praise for doing nothing, you can be sure Chidambaram’s call will go unheeded. India’s banks will not be bidding for Citibank anytime soon.