How the Indian M&A sector is Rising and What You Need to Know Before Signing a Deal
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With the Flipkart-Walmart deal, the Indian M&A sector has seen a massive boost. For long now, the tech M&A sector has been walking a silent path with deals happening here and there, mainly involving the smaller start-ups. But the Flipkart-Walmart deal has set a precedence for exits, making way for start-ups to sit up and recognize the importance of exits too.
A report done by EY also states that the M&A sector in India is expected to remain positive this year driven by domestic consolidation, market share expansion and entry into new markets. The report also stated that 2017 saw a total 1,011 deals taking place for USD 40,961 million.
Entrepreneur India spoke to experts about how enterprising the tech M&A in India looks and what are the challenges in the same.
Innovation & Digitization Will Push For More Deals
The need to innovate and get with the changing times, will see a growth in the number of deals happening across the country. With disruption picking up a fast pace and the competition running high in every industry, every company is moving to bring about innovation in-house.
This pushes corporations and MNCs to acquire start-ups that are working in their sector and welcome on board their innovations. “India is witnessing a surge in ‘entrepreneurial energy’ with young minds working on business ideas leveraging tech. This is creating a world of opportunities for agile and innovative start-ups to scale-up their ideas through mergers with like-minded companies which offer synergies,” said BVM Rao, Customer Care Associate and Head - Human Resources, Shoppers Stop Limited.
India – A Rising Market
The Indian economy has been at the centre stage of the world’s attention since the past few years now. With growing interests from companies across the world to set up shop in India, the prospects for successful M&As are only rising in India. Reports suggest that India is only going to see an increase in the number of deals happening over the next few years.
The Indian government too has a role to play in the increasing number of deals happening in India. A PwC report on M&A stated that almost all relevant corporate laws/regulations in India have been revamped in the last few years, be it the Takeover Code, delisting guidelines, Companies Act, Accounting, Competition Law, etc. Tax laws are continually evolving and so are Foreign Exchange Management Act (FEMA) regulations, impacting both inbound and outbound investments.
Behind the Scenes of M&As
However, the M&A sector is not one devoid of challenges, especially in the hot and rising technology sector of India.
A short-sighted M&A deal with the rush to acquire market share, without much thought to sustainable profitability, create baggage on balance sheets, said Rao. “So like any wise business decision, M&A deals need to be exercised with due diligence and long-term value-creation outlook,” he said.
Signing a deal, however lucrative it may sound cannot be done without a well-conducted research on the company.
Rajeev Shroff, executive business coach and board member at Cupela Consulting, said that when you look at many tech companies, they are living in a bubble and are struggling, where a buyout can add to a lot of strain. “The smaller tech companies with a few clients carry a lot of customer flight risk, leaving the buyer with little to report on their balance sheet. There is also funding mania, and post merger they run risks of loosing key management. If we look at even the best visible M&A deals of 2017, many are struggling, in many the original promoter left, carrying a lot of the value with them,” he said.
So, what needs to be thought about before going ahead with a deal? Shroff said that sound reasoning, due diligence, and execution will ensure that an M&A activity is successful. “There are three primary triggers for M&A, inorganic growth, vertical integration or a distress sale. The most common form, inorganic growth, typically within the same industry where the buyer has depth of experience, capable management in the company being bought, and ease of transferability are better poised for success,” he said. Shroff added that a successful Vertical integration is focused on reducing costs, more control, creating barrier to entry, eliminate supplier power and possibly to improve quality control.
Buying a distressed company while tempting and may appear a bargain, needs in-depth due diligence. “Such a company should only be bought if there is a good understanding of the cause of decline - is it poor delivery and execution or the sector is declining, and finally experience in turning around businesses is essential,” he said.