First-time buyers drive M&A activity as strategic deals become key in new normal

The number of such deals is expected to touch 85 this calendar year with first-time buyers accounting for almost 80% of them, according to a report by Bain and Company shared with ET.

Unlike in 2017-2019, when mega deals – valued at $5 billion or more – comprised a majority of deal activity in India, the last two years have seen heightened activity in mid-sized deals.

The Covid-19 pandemic has accelerated disruption across sectors and large conglomerates as well as startups are responding to the changes through M&As and divestitures.

The nature of deal-making has also changed from earlier years with executives making ‘scope’ deals—acquisitions outside a company’s core business – and ‘capability’ deals – acquiring a new capability. As many as 40% of deals this year fell in these categories, the Bain report said.

“Scope and capability deals are increasing in the market and what it means is that the nature of M&A is changing from just sort of growing the business and building scale to now really transforming the business and a lot of that is transforming for a post Covid-19 world,” said Vikram Chandrashekhar, partner at Bain & Company.

This year has seen well-funded startups spend big to snap up new companies. The top seven startups, including Byju’s, Unacademy, Pharmeasy, and Flipkart acquired 47 companies to enter new segments, geographies, enhance their offline capabilities, and scale their existing business, the report states.

“Armed with cash in hand and higher valuations that make their equity more valuable, a lot of startups are using the inorganic route to clock faster growth,” said Kashyap Chanchani, managing partner at Mumbai-based investment bank The Rainmaker group. “The speed to market strategy has meant these companies grow quicker both horizontally and geographically. Most mature startups have dedicated corporate development teams and an exit by sale is a real option for founders now. Till two years ago, a majority of M&As would have been out of distress and lack of options,” he said.

Byju’s alone spent over $2 billion across 11 acquisitions that included a
nearly $1-billion cash and stock deal to acquire offline tutorial chain Aakash Educational Services.

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Startups are leveraging their stock as valuable currency to make these deals possible. About two-thirds of deals by startups were stock-plus-cash transactions, the Bain report said.

“They’re using M&A as a lever for transformative growth,” said Karan Singh, managing partner at Bain & Company.

Large conglomerates also contributed to the M&A high as they sought a “strategic reshaping of their portfolio”, trying to build businesses for the next generation.

For example, Reliance Industries spent significant capital with acquisitions in retail, digital, and renewables. The Tata Group has struck over 20 deals in the last two years, including multiple acquisitions of startups such as egrocer BigBasket and healthcare company 1mg to build its super app, according to Bain’s report.

“The choice between build versus buy and invest versus innovate will continue to spur greater consolidation in the digital space as companies continue to focus on scale, size and skill,” said Ankur Pahwa, partner and national leader – ecommerce and consumer internet at EY India. “This will continue to increase as M&A is no longer optional and is increasingly becoming an important strategic imperative.”

The Bain report said the momentum in M&A activity will continue next year. “The penalty for sitting out is real,” Bain’s Chandrashekhar said. “Companies that acquired or divested during turbulent times outperformed their peers in earnings growth by two to one.”

“It has been a fairly interesting year as M&A activity hit all-time records. We expect this trend to continue in 2022 and foresee the next wave of companies become more adventurous on the M&A front,” said Karan Sharma, executive director and cohead, digital and technology, Avendus Capital.