VC-backed Indian entrepreneurs start shopping for growth - Merger & Acquisition activity increases

M&A is a key focus for us this year. And given our concentration on mobile, companies that have made a mark in this space will be on our radar,

stated a recent press release by Flipkart.

Talent acquisition is one of the best ways for us to get teams on board, which are collaborative and entrepreneurial, think out of the box and are hungry to develop disruptive products,

said Sumit Jain, Co-founder and CEO, Commonfloor.

Virendra Gupta of Newshunt mentioned to looking at more acquisitions this year and added,

We invite all stake holders in the eco-system to partner with us to create new digital content and get discovered and monetize through the NewsHunt platform.

The above are just a few of the many news bytes and statements doing the rounds in the frenzied Indian startup ecosystem. As the new-age Indian entrepreneurs are gearing for merger and acquisitions (M&A) at multiple levels, the market shows a new appetite for ambitious deals. One thing which everyone is chasing here is growth. The current market clearly seems to reward growth vis-à-vis profit. In such a scenario, entrepreneurs are finding M&A a seductive tool to achieve their ‘growth’ goals.

According to Andrew Waldeck, Partner Innosight and co-author of ‘The New M&A Playbook’, there are two purposes that drive M&A: “In one of those cases, a manager’s looking to improve the performance of their current business model. So they’re looking to either increase their prices or improve their cost position. And so in that case, the types of transactions that you would pursue there, we characterize as being ones that are leveraging your model. That’s different than the other purpose, which is where you’re really trying to fundamentally transform your business. Here, you’re looking at ways to expand into new markets, go after new customers. And in that instance, we describe those transactions as reinventing my model.”

In the Indian startup space, the first purpose is at play. Entrepreneurs with cash in the bank are looking at improving the performance of their current business model and consolidate their market share.

So what are some of the key drivers fuelling M&A in India now? Venkatesh Peddi, Partner at IDG Ventures puts it into four buckets:

Large Startups – Companies like Flipkart, Snapdeal, OlaCabs, Zomato etc., have grown extremely fast and have now attained sizes and funding where they are clearly looking at inorganic growth opportunities. These companies have a very different mind-set as compared to the traditional large companies of India. They are much more aggressive about going after these inorganic opportunities to build and grow.

Global interest – The Indian market is attracting large and aggressive global players like Amazon, Alibaba, SoftBank, etc., which has accelerated the race for good companies/potential targets.

Attractiveness from seller’s point of view – Most of the startups, which otherwise would put their heads down and focus on execution hoping for an eventual IPO, are instead very actively considering interest from acquirers, given that they are getting valued fairly.

Fundamental growth in the economy – This is the core reason why all the above factors exist. The reason I am mentioning it separately is because it’s this underlying explosive growth that is driving entrepreneurs to look for aggressive inorganic opportunities.

Ravi Gururaj corroborates,

I believe India has hit a critical tipping point along multiple important vectors - number of online users, user engagement level, willingness to engage in online commerce, payments and supply chain, last mile logistics infrastructure and mobile penetration. All of this has whetted investor appetite in India centric opportunities. I expect we will see both greater flow of capital into India and many more new investors engaging in India at all tiers. The resulting larger number of better capitalized ventures across the landscape will ensure M&A heats up considerably-founders flush with their VC-funded bank accounts will seek to ‘buy market share’, ‘buy technology innovation’, ‘buy time-to-market’, ‘buy talent’ - all of which will cause the number of M&A deals to grow significantly. I believe India is at the cusp of seeing many more substantive M&A deals being done for market share and top line growth goals to consolidate vertical segments, to enrich offerings with new innovations and to deny competitors an edge. Deals of that nature are often done at a premium with the stock of the acquirer being used as the primary currency for such mergers.

Yes, the days of infancy of Indian startup eco-system is behind us. “Several companies have scaled rapidly thanks to a very large and active consumer base (considered to be one of the fundamental strengths of Indian eco-system). The growth rate seen by these companies is unprecedented - never in the history of India had a company scaled to $1B in valuation (or revenues) in 5 years or less. Inorganic growth via M&A is one of the ways in which they can sustain their fast growth rates and continue to stay one step ahead. I strongly believe that this is just the beginning and we will see many more large M&As in the years to come,” comments Rutvik Joshi of Inventus Capital.

Kunal Walia of Khetal Advisors agrees, “The current uptick in the well-funded tech/e-commerce companies acquiring smaller complimentary players is likely to grow significantly in the next 2-3 years. We are finally at a place in the Indian startup ecosystem where we have several very well-funded startups ($50M+) that are between them sitting on more than $1.5B in un-allocated funds. Whilst most of these funds would go towards supporting their internal growth, a fair share (25%-30%) will be used primarily for acquiring businesses that can help the large companies complete their offerings. Snapdeal’s acquisition of Freecharge is a great example of how to do a strategic M&A which allows the final business to reap far bigger dividends by offering a more complete offering.”

The first significant sign of things to come unfolded back in 2013. Rutvik says, “Acquisition of RedBus by Naspers in 2013 in my opinion started the trend of large M&As in India. The size and number of M&A deals in India has only gone up since then. Till a few years back no one believed that we can see acquisitions greater than $100M can happen in India. But now it seems normal to raise $100M in financing since investors believe that large M&As can happen in India.”

While the euphoria seems to be justified now than ever before, a point to note is that another key driver of M&A is the talent warfare these e-commerce/tech companies have unleashed in the market. Acqui-Hires are fast becoming a norm.

“The larger tech companys face the same issues as the rest of the eco-system, that is hiring the right talent. If you are able to acquire a team of entrepreneurs/engineers in a space where they have demonstrated capabilities then it’s a win-win for both. A lot of the acqui-hires are also being driven by VCs who are keen to find exits for the laggards in their portfolio. We feel you are likely to see around 10-12 acqui-hires by each of the larger tech startups in the next 12-18 months itself. There is a huge demand for tech talent and acqui-hires are a relatively painless way to significantly enhance your delivery capabilities without the additional risk that comes from new hires (team dynamics, etc.) Also given that most acqui-hires are structured in a fashion that the team is paid a bulk of the money 18-24 months post the acquisition, it ensures relatively lower attrition rates. We think you are likely to see major upswing in both acqui-hires (as VCs expand on getting rid of laggards in their portfolio) as well as higher value deals as more and more companies that have been relatively well-funded till date get acquired by some of the Unicorns in adjacent sectors,”

reflects Kunal. So how are we faring in comparison to China and US in this space?

“Even if deal volume and dollars go up by as much as 8-10X, we believe India would still lag behind US and China by at least 50% in terms of the Dollars being raised by each ecosystem. We have a long way to go in terms of exits (both no’s and dollars). But I believe the recent acquisitions by Flipkart (Adiquity: acqui-hire and Myntra: high value), Paytm (Plustxt: Acqui-hire) and Snapdeal (Freecharge: High Value) are early signs of a maturing startup scene,” enthuses Kunal.

“There was a good report by SignalHill & iSpirt last year on this. Over a three year period that they looked at the data of technology companies, India was almost insignificant with $1B M&A value versus $300 B plus in U.S. and $9 B in China. However, we can sense significant difference on the ground in the last 6-8 months, in terms of number conversations happening in the start-up ecosystem around potential M&As. While India might still remain very small compared to U.S., the relative gap should decrease and hence, the same report by SignalHill & iSpirit, over the next two years should be worth reading,” says Venkatesh with a smile.

And Ravi refrains from making comparisons. “We should refrain from benchmarking ourselves constantly to the US which is an ecosystem that has been 50 years+ in the making or to China which is operating at 10X India's scale and where ventures enjoy superb infrastructure, a nicely walled garden regulatory environment and unmatched injections of capital and support from the government. We here in India should be inspired by the US and China, but not obsess over them. Let's go build our own India success story over the coming decade. The opportunity is here and now and we as a community will have nobody to blame but ourselves if we fail to rise up to this 'carpe diem' moment in our history.”

The underlying merit of an M&A might be many for a company (and time will only prove those cost benefit analyses). But for the ecosystem the merits are loud and clear. As Rutvik articulates,

Indian companies can and will value other Indian companies fairly. We do not have to depend 100% on foreign acquirers wanting a piece of the Indian market. And it is possible for founders, employees and other shareholders to make money in a fair M&A. It will result in potential employees appreciating ESOPs and allow founders to align the interest of the entire company. Many Indian startups find it hard to attract good talent because employees have never seen wealth being created out of ESOPs. The Freecharge-Snapdeal deal has proved that wrong (based on what I read on media).

M&A is providing real exit opportunities to both investors and founders to realize their equity value and become a part of a grander scheme (using stock acquisitions as opposed to cash purchases) in the process. While this is great news for the ecosystem, it is equally important that founders prepare a well thought out post-M&A integration strategy. Merely shopping by itself is not enough. Various studies have estimated M&A failure rates to be in the high 70% to 90% range.

So, while euphoria continues, and deservedly so, it would be useful to remember that M&A is like a marriage, and real work begins after the marriage ceremony is over.

Here are some notable M&As in no particular order. If I have missed anyone in the list, please point it out.