A record 189 M&As have already happened this year, a much high figure than the preceding two years. Amid a funding winter and shaky sentiments, are M&As good news for India’s start-up segment?
2022, clearly, has brought in a lot of changes and surprises for the start-up ecosystem. While on one hand, we have seen the emergence of underdogs as unicorns, on the other we have seen some of last year’s superstars struggling to keep their valuation intact. Amidst the upheaval or course correction, as many experts believe is happening, there has also been a rise in mergers and acquisitions (M&As).
With the funding glut setting in globally, smaller players struggling to raise cash are becoming easy acquisition targets for well-established start-ups planning to fuel their future growth ambitions. Such decisions are mostly aimed at gaining market share, adding revenue streams and getting access to technology, geography or talent.
While some really strategic ones like Zomato’s acquisition of Blinkit, Sharechat taking home MX Takatak, and Swiggy taking Dineout under its umbrella grabbed headlines, most others remained under the radar. As against, 106 and 267 acquisitions in 2020 and 2021 respectively, there already has been 189 acquisitions in 2022, as per data by Venture Intelligence.
So, is this widespread consolidation good for the overall industry? Experts say that apart from a few synergies which could be exploited, M&As, particularly at this point, aren’t a bad idea.
“It is good that consolidation is increasing. It will pick up pace in the next 12 months. Many VCs are introspecting about their portfolio companies and understanding which of them need support. If they believe that some company is not going to survive the next 12 months, they may encourage the company to look for an M&A,” says Amit Nawka, Partner (Deals) start-up Leader, PwC India.
Whenever a segment faces a jolt or turmoil, M&As see an upward trend. While it becomes a way to survive for a smaller firm, it gives the acquirer more strength in terms of size and competence, not to forget that the deal may come at a price lower than during bullish times. In the past six months, as many as 118 small startups were acquired by big startups at a valuation of $1,678 million, according to Venture Intelligence data.
This is much higher compared to 2020 and 2021 when only 71 and 178 small firms were acquired by big startups at a valuation of $5,236 million and $1,026 million, respectively.
Interestingly, most M&As have occurred in the fintech and edtech space – fintech has witnessed 21 acquisitions and there have been 18 such deals in the edtech space. While edtech is a segment that has seen tailwinds this year, with the biggest of names in the segment struggling to hold on to their position in the market, fintech, on the other hand, is one of the three-most funded sectors this year. The other two are e-commerce and SaaS (software as a service).
Fintech major PhonePe acquired Wealthdesk, OpenQ and Explorium to expand its financial services play beyond payments; Pine Labs acquired Setu, Mosambee and Qfix Infocomm; Razorpay acquired Curlec and Izealiant Technologies apart from the other deals that were sealed in the segment.
Among edtechs, BYJU’s acquired Northwest Executive Education, upGrad acquired INSOFE, and College Dekho acquired GetMyUni and PrepBytes. upGrad’s acquisition will give it an edge in AI and ML courses, which are becoming very popular in India due to the rising demand for talent with these skills from corporates and startups.
Pravin Agarwala, CEO and Co-founder of Better Place which acquired OkayGo and Ezedox this year said that M&As are common to every sector and show a segment’s maturity.
“Historically, consolidation has happened in all sectors. It is a way to unleash the product and innovation capabilities of companies and expand their customer acquisition potential. While it has usually happened in traditional sectors, the maturing startup market has opened up ample opportunities for consolidation," Agarwala said.
Tiger Global-backed Gupshup, which turned into a unicorn last year also has been on an acquiring spree. In the last six months, the company made four acquisitions with the latest one being of One Direct at an undisclosed amount. “Our acquisition strategy of One Direct is in sync with Gupshup’s vision to make business-to-consumer communication as simple, easy, and efficient as chatting with friends and family,” said Ravi Sundararajan, COO, Gupshup.
Of the M&As in 2022, the Zomato-Blinkit union is the most significant and talked about for sure. The all-stock deal of $570 million is Zomato’s bid to broaden its offerings beyond food delivery amid a free-fall in its share prices since its debut on the bourses last year. Sadly, the company’s shares tanked a further 14 per cent since the announcement of the merger three days back. Analysts are also saying that the deal may delay Zomato’s road to profitability.
Another acquisition that was very significant this year was Sharechat’s taking over of MX Takatak at a valuation of $700 million. MX Takatak with over 150 million active users (MAUs) across 10 languages saw a huge jump in its popularity after the government banned Tiktok in 2020. ShareChat—an Indian social media platform along with Moj—another short video platform, is a subsidiary of Mohalla Tech and is backed by Temasek, Google, and Twitter. Unlike Zomato, Sharechat’s deal-making decision till now has shown no signs of backfiring. “Right acquisitions done in the right fashion can help you speed up, and achieve your goals faster. It can also help you reduce competition in the market and therefore the cost of operating in the market. Plus, it helps you get into geographies that you're not present in,” says Manohar Singh Charan, CFO, ShareChat and Moj.
About the acquisition, he said, “We wanted to consolidate the market through the MX Takatak acquisition. What would have otherwise taken us a few quarters to acquire and retain, we got that through one acquisition.”
Other key deals of the year were the acquisition of pharmaceutical start-up Enaltec Labs by La Renon in January and Swiggy acquiring Dineout from Times Internet at a valuation of $120 million. The deal allows Swiggy to use Dineout’s software solutions for restaurants, which is spread across domains of marketing and payments. It will also benefit from Dineout’s events business as it looks to increase its revenue streams.
Sometimes for well-capitalised startups who have significant capital, M&As are part of their core strategy. They keep looking for niche companies in the ecosystem, which make sense for them to acquire and which can come at a reasonable price. Such a scenario isn’t good for M&As, say experts.
“In a down market, the acquired start-ups with lesser bargaining power will be at a loss. But if it is an inbound market with start-ups having multiple suitors backed by good management teams, it may not be a reason to worry for acquired startups,” says Sharechat’s Charan.
Also, because of the fund rush over the last two years, a slew of unsustainable businesses was born and perhaps for them, M&As can be a decent outcome. But problems arise when investors sometimes put their liquidation preferences.
In that case, employees don’t really benefit from the change of hands. “If an M&A is happening you have to assume that the company is not in great shape, so VCs may also take a haircut on it. That way it is not good because wealth creation is not really happening. The other problem with M&A is, historically, a lot of times, products don’t get integrated synergetically. Case in point: the several mergers of banks that have happened over the years,” says Nithin Kamath, Founder & CEO, Zerodha.
Let’s wait and watch.