mergers and acquisitions: first-time buyers drive mergers and acquisitions activity as strategic deals become the key to a new normal

Mergers and Acquisitions (M&A) transactions in India are nearing an all-time high as early adopters, especially startups, generate a deal volume valued at over $ 75 million.

The number of such deals is expected to reach 85 this calendar year, with early adopters accounting for nearly 80% of them, according to a report by Bain and Company shared with ET.

Unlike 2017-2019, when mega-transactions – valued at $ 5 billion or more – made up the majority of transactions in India, the past two years have seen increased activity in mid-size transactions.

The Covid-19 pandemic has accelerated disruption across all industries and large conglomerates and startups are responding to changes through mergers and acquisitions and divestitures.

The nature of transactions has also changed from previous years, with executives entering into “scope” transactions (acquisitions outside a company’s core business) and “capacity” transactions – acquiring new capacity. Up to 40% of transactions this year fell into these categories, according to the Bain report.

“Scope and capacity agreements are increasing in the market and this means that the nature of mergers and acquisitions is changing from simple business growth and scale building to true business transformation. business and a lot of that is turning for a post Covid-19 world, ”said Vikram Chandrashekhar, partner at Bain & Company.

This year, well-funded startups have spent a lot to attract new businesses. The top seven startups, including Byju’s, Unacademy, Pharmeasy and Flipkart, have acquired 47 companies to enter new segments, geographies, enhance their offline capabilities and expand their existing businesses, the report says.

“Armed with cash and higher valuations that make their equity more valuable, many startups are using the inorganic route to accelerate their growth,” said Kashyap Chanchani, managing partner of Mumbai-based investment banking The Rainmaker Group . “The speed-to-market strategy has enabled these companies to grow faster both horizontally and geographically. Most mature startups have dedicated business development teams, and exit per sale is now a real option for founders. Until two years ago, the majority of mergers and acquisitions would have taken place out of distress and a lack of options, ”he said.

On his own, Byju has spent more than $ 2 billion on 11 acquisitions, including nearly $ 1 billion in cash and stocks to acquire the offline courseware chain Aakash Educational Services.

Startups are leveraging their stock as a valuable currency to make these transactions possible. About two-thirds of startups’ transactions were in stock and cash, according to the Bain report.

“They are using mergers and acquisitions as a lever for transformative growth,” said Karan Singh, managing partner at Bain & Company.

Large conglomerates have also contributed to the peak of mergers and acquisitions as they sought a “strategic portfolio shuffle”, trying to build businesses for the next generation.

For example, Reliance Industries has spent significant capital with acquisitions in retail, digital and renewables. The Tata Group has made more than 20 deals over the past two years, including several acquisitions of startups such as egrocer BigBasket and healthcare company 1mg to create its super app, according to the Bain report.

“The choice between building versus buying and investing versus innovating will continue to drive greater consolidation in the digital space as companies continue to focus on scale, size and skills,” said Ankur Pahwa, partner and National leader in e-commerce and consumer Internet at EY India. . “This will continue to increase as mergers and acquisitions are no longer optional and increasingly become an important strategic imperative. ”

The Bain report said the momentum for mergers and acquisitions will continue into the next year. “The penalty for being absent is real,” Bain’s Chandrashekhar said. “Companies that bought or sold in times of turmoil have outperformed their peers in terms of two-to-one earnings growth. ”

“It has been quite an interesting year as mergers and acquisitions have reached all-time highs. We expect this trend to continue into 2022 and expect the next wave of companies to become more adventurous on the M&A front, ”said Karan Sharma, Executive Director and Co-Director, Digital and Technology, Avendus Capital.