m&a: First-time buyers drive M&A activity as strategic deals become key in new normal
Mergers and Acquisitions (M&A) in India are nearing an all-time high as first-time buyers, especially startups, hit more than $ 75 million in transaction volume.
According to a report by Bain and Company told ET, the number of such deals is expected to reach 85 this calendar year, with first-time buyers accounting for nearly 80% of that.
Unlike 2017-2019, when mega deals - valued at $ 5 billion or more - made up the bulk of deal activity in India, there has been increased activity in midsize deals over the past two years.
The Covid-19 pandemic has accelerated disruption in all sectors and large corporations and start-ups are reacting to the changes through mergers and acquisitions and divestments.
The way business is done has also changed from previous years, when executives forged “size” deals - acquisitions outside of a company's core business - and “skills” deals - the acquisition of a new skill. Up to 40% of deals fell into these categories this year, according to the Bain report.
"Scope and performance deals are increasing in the marketplace and that means the nature of M&A is changing from growing the business and expanding the size of the business to actually transforming the business, and a lot of it is changing for a post-Covid-19 period World, ”said Vikram Chandrashekhar, Partner at Bain & Company.
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This year, well-funded startups have spent a lot of money setting up new businesses. The seven leading startups, including Byju's, Unacademy, Pharmeasy and Flipkart, have acquired 47 companies to enter new segments and regions, improve their offline skills and scale their existing businesses, the report said.
"Armed with cash and higher valuations that add value to their equity, many startups are using the inorganic path to grow faster," said Kashyap Chanchani, managing partner of Mumbai-based investment bank The Rainmaker Group. “The speed-to-market strategy has resulted in these companies growing faster both horizontally and geographically. Most mature startups have dedicated business development teams and an exit through sale is now a viable option for founders. Until two years ago, the majority of mergers and acquisitions would have been dire and lack of options, ”he said.
Byju's alone spent over $ 2 billion on 11 acquisitions, including a nearly $ 1 billion cash and stock deal to acquire Aakash Educational Services offline tutorial chain.
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Startups use their stocks as valuable currency to make these deals possible. About two-thirds of startups' deals were stock-plus-cash, the Bain report said.
"They use M&A as a lever for transformative growth," said Karan Singh, Managing Partner at Bain & Company.
Large corporations also contributed to the M&A high as they sought to "strategically redesign their portfolios" and try to build businesses for the next generation.
For example, Reliance Industries has spent significant capital on acquisitions in the retail, digital and renewable energy sectors. The Tata Group has closed over 20 deals in the past two years, including several acquisitions of startups like Egrocer BigBasket and healthcare company 1mg to build their super app, according to Bains' report.
"Choosing to build or buy and invest or innovate will continue to drive consolidation in the digital space as businesses continue to focus on size, size and expertise," said Ankur Pahwa, Partner and National Director - E-Commerce and Consumer Internet at EY India. "This will continue to grow as M&A is no longer optional and is increasingly becoming an important strategic imperative."
According to the Bain report, the momentum in M&A activity will continue over the next year. "The penalty for sitting out is real," said Bain's Chandrashekhar. "Companies that bought or sold in turbulent times outperformed their competitors in terms of earnings growth by two to one."
“It's been a pretty interesting year as M&A activity hit new records. We anticipate this trend will continue into 2022 and expect the next wave of companies on the M&A front to be more adventurous, ”said Karan Sharma, Executive Director and Co-Head, Digital and Technology, Avendus Capital.
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