M&A

Bolt-On Way To Scale

Acquisition strategies for an acquirer company are broadly twofold – one, shaking hands with a competitor, directly or indirectly, and two, with companies that have a product or service or technology or intellectual property.

Acquiring companies for products, services, technology or intellectual property to enhance the efficiency of their own various business functions and obtain a distinct comparative advantage at a much cheaper cost than doing everything organically has become the go-to route for acquirers.

Acquisition strategies for an acquirer company are broadly twofold – one, shaking hands with a competitor, directly or indirectly, irrespective of its size and growth, to expand its market share; and two, with companies that have a product or service or technology or intellectual property. The latter deals, jargoned as tuck-in or bolt-on acquisitions are the de facto type in today’s mergers and acquisitions (M&As). Out of 146 M&As in 2016 worth $881 million in the local start-up world reported by The Fourth Wheel 2017 - the private investment report by accounting and advisory firm Grant Thornton India - a decent chunk reflected in the rise of such bolt-on deals where early to late stage technology enterprises gobbled start-ups. It helped them either to add value or revive business functions which are not their areas of strengths.

Lean on Growth

From traditional businesses, the strategy has been dispersed across e-commerce and technology start-ups in their spirit to build leaner and more cost efficient businesses. The brightest examples of such deals include Flipkart-Myntra, SnapdealFreeCharge, Quikr-CommonFloor where the former picked the latter to bolster its business verticals or to leverage it to boost its core business. “The most obvious benefit for the acquirer in a tuck-in or bolt-on acquisition is the delta that can be achieved on the cost savings over a period of time as compared to building that same vertical, the tangible and intangible elements thereof in terms of human capital, creation of multi-geographic presence, complimentary service verticals, opportunity costs and implementation aspects,” explains Vinayak Burman, Managing Partner, Vertices Partners – Mumbai-based boutique law firm - having practice areas including M&As, joint ventures, private equity and venture capital funds.

Largely, the bolt-on deals have been either to strengthen logistics or delivery and payment side of businesses or software-as-a-service start-ups to improve customer experience for e.g. Zomato-Sparse Labs, Myntra-InLogg, Craftsvilla-Sendd deals in delivery space; Flipkart-PhonePe and FX Mart, ShopClues-Momoe, Ola-Qarth in payment vertical; and CarDekhoConnecto, FreshWorks (earlier known as Freshdesk)-Pipemonk, Chatimity etc., in other relevant areas. “For us, bolt-on deals are around enhancing customer experience. The biggest value out of such deals for us is having a good team,” says Amit Jain, CEO, and Co-Founder, CarDekho.com. Usually, the size of the acquirer or target firm in such deals is small as they are picked early by acquirer firms based on the value its product or service can add to a large company. And it is easy too. “When you acquire a small team it is easier to absorb them. Initially, you have to handhold them to make sure that they are empowered enough to make the change,” adds Jain.

Competitor vs Large Brand On the acquiree part, it makes sense to ensure the continuity in terms of operations and the opportunity to be enveloped into the macro scheme of things even as the brand name eventually is diluted. “Though it pinches sometimes that the name Sparse Labs is not there but it is not a big deal. You have to think rationally. If there is no road ahead then it is better to sail past rather than trying to sustain and burning money,” says Pankaj Batra, Founder, Sparse Labs. Zomato acquired delivery tracking start-up Sparse Labs in September 2016. “With Zomato, my product continues as it is and there is much bigger scale and support available. So there is a much bigger canvas to paint on with them. Also, you get to meet much more people and build relationships which also help you, if you want to start-up again,” asserts Batra. The startup couldn’t scale since it couldn’t get the right sales talent but the product helps Zomato in giving visibility on what time the order is out from the kitchen, when it is delivered, where the delivery boy is etc. Sparse Labs is now known as Zomato Trace.

But then that’s only an option for an entrepreneur to sell to a larger company as a part of a bigger picture versus joining forces with a direct competitor. He/she may choose former if the acquiring brand is big enough where the entrepreneur can have more responsibilities instead of doing the same thing in competing for business.

“It depends on two things. First, what deep issue the acquiring company, whether a competitor or a horizontal player, is solving better than you ever can. Second, there has to be an alignment between you and your acquirer on what and how you want to solve the problem,” says Vinay Singh, Founder, Stepni. Quikr acquired Bengaluru-based car repair and servicing for used cars platform Stepni in September last year. Later, Singh joined Kanwaljit Singh, former Co-Founder of venture capital firm Helion Venture Partners, in his new venture capital fund Fireside Ventures. The new fund raised capital from PremjiInvest, Mariwala family office, and RP-Sanjiv Goenka Group. The maiden fund size is of Rs 300 crore of which Fireside raised Rs 180 crore in June this year.

Stepni tried surviving on a wafer thin margin because of the high cost of acquiring customers. So it had two options – one, generate revenue from alternate ways out of the same supply pool like an accessory or spare part sales and two, look for getting acquired.

“Quikr had the largest consumer base among the entire horizontal players we looked at. Also, Quikr was planning about getting into spare parts and accessories which aligned with our market outlook,” adds Singh. So, from customer acquisition and business model stand point it made sense for Singh to shake hands with Quikr.

“Acquiree companies sell mainly because they don’t have any other option left, they struggle with their market, they are not able to scale up because of lack of capital or they are forced by their shareholders for an exit,” says Abhishek Vaish, Managing Partner, Nucleus Partners – a financial advisory firm based in Delhi.

However in many acquisitions, often entrepreneurs exit the entity in less than six months as they no longer steer the ship. Ideally, in bolt-on deals they should stick to the parent brand for at least a year or two to deliver the value expected out of them by the bigger brand.

(This article was first published in the July issue of Entrepreneur Magazine. To subscribe, click here)

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