Investors sell Axis Bank shares, the day after it announced the acquisition of Enam’s businesses. This is because commercial banks have a horrible post-takeover record of running investment banks

The market has given a thumbs down to the Axis takeover of the high-profile but intensely private companies of Enam. This is not surprising. Moneylife had written yesterday that the deal would not be great for Axis shareholders. We interpreted the deal as a sweet exit deal for street-smart Enam promoters.

Today, the Axis Bank stock opened at a high of Rs1,499, which was up Rs33 from the previous close. However, massive selling soon afterwards took the stock down sharply to Rs1,389. By the end of the day, the stock was down by almost 3%. Clearly, the market is unconvinced by the elaborate arguments of Shikha Sharma of Axis and Vallabh Bhanshali of Enam in favour of the deal.

Yesterday, Axis Bank announced it would merge Enam's institutional broking and investment banking businesses into an Axis subsidiary and that it would issue Rs2,064 crores worth of Axis Bank shares for the deal. We interpreted this as a bad purchase for Axis because Enam's brand name is not institutional. It has value only if the original promoters are driving the business.

According to Ms Shikha Sharma, managing director and CEO of Axis Bank, the transaction takes into account revenue and intangible assets such as people, brand, business relationships and the business model. Unfortunately, all intangible assets in this case have no long-term value. It is only the Enam revenues that will last for sometime and then dwindle. Hedge fund managers have an interest in dealing through Enam as a broker and not through the desk of just another bank. Clients are not drawn to Enam for its institutional expertise or the brand name per se, but mainly for the personal expertise of its promoters who have shown exceptional acumen in understanding Indian companies and markets. We were skeptical whether businessmen, who value the individual wisdom of Enam promoters, would now seek this through Axis. The market seems to agree with us for now.

Another reason investors are hardly convinced about the deal is because there is simply no fit between professionally-run Axis and Enam, which is almost like a medium-sized partnership firm. To paper over this gap, both Shikha Sharma and Vallabh Bhanshali waxed eloquent about a "strong cultural fit between the two organizations". This is bunkum. There is no cultural fit at all.

Axis Bank, formerly UTI Bank, is hardly more than a decade old. It had massive losses, a poor work culture and indifferent ownership and control until Dr PJ Nayak stepped in. Dr Nayak built the bank to its present shape with a leadership that is very highly regarded. His period was marked by the development of a customer-focused retail banking culture. What has that got to do with the cut, thrust and sharp practices of a secretive investment bank?

Now look at the current leadership of the bank. Shikha Sharma is barely a year into her job as CEO. There have been departures and fresh hiring which has changed the bank culture, insiders say. Indeed, there are murmurs that the culture at Axis Bank is changing, to what ICICI Bank was, until 2007, even as ICICI Bank has turned more cautious in its approach. So, Axis is now trying to find its own "culture" under the new CEO. On the other hand, with the original promoters no longer calling the shots, Enam's culture will disappear like the morning mist, inside Axis. With a poor cultural fit and a host of intangible assets that have no value, institutional investors don't see much to get excited about this deal.

This is not a surprise. The acquisition of investment banking firms and hedge funds by large commercial banks does make headlines and they've been quite a macho thing to do on Wall Street for many decades. They have enriched the dealmakers, CEOs and others, but have not created much shareholder value, thanks to differences in culture and motivation.

In September 2008, The Economist magazine wrote: "Commercial bank takeovers of investment banks have a horrible history because of the stark cultural differences." The reason is that commercial banks have lower risk tolerance than investment banks. Very simply, default is a prime consideration for commercial banks, but that's not so for deal-driven investment banks. Investment banks help companies raise capital and they advise on takeovers. For this they earn fees and the success or failure of these companies is not a large concern.  Commercial banks, on the other hand, are more risk averse.  They are greatly concerned about default risk since their core business is accepting deposits and making loans. They will only make a profit if the borrowing corporations repay. Therefore, the risk tolerance of these banks will be different from that of investment banks.

The merger of JP Morgan and Chase Manhattan Bank in late 2000 illustrates how risk and cultural differences play out. The merger was widely touted as a great fit. Over the next three years the stock price lost over a third of its value, 10,000 people were laid off, and the company was able to post only one quarter of positive earnings. Similarly, in 1982, American Express bought Lehman Brothers, one of Wall Street's leading investment banks and merged into the Shearson brokerage unit it acquired the year before. But after years of losses that cut deeply into American Express earnings, the group was split up and eventually Lehman was spun off and listed again. There are scores of such failures. Indeed, there is hardly any example of a successful takeover of an investment bank by a commercial bank, without substantial slash and burn.