Bengaluru, October 11

Amid a funding crunch, start-up merger and acquisition (M&A) deal volumes in the January to September period of 2022 have increased 55 per cent over the same time period last year, according to Grant Thornton Bharat’s data accessed by businessline

“Compared with the January to September period in 2021, there is a 55 per cent increase in volumes and a 105 per cent increase in total deal value from $475 million to $975 million, driven by three high-value deals. Given the above stats, we expect deal volumes for 2022 to also cross the 2021 figures in the coming months,” said Shanthi Vijetha, Partner-Growth at Grant Thornton Bharat. 

Adding to this, Amit Nawka, Partner, Deals and Start-ups Leader at PwC India, said that a significant portion of the M&A deals happening now are opportunistic share-swap deals, unlike the majority of all-cash deals that happened in 2021. 

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Another industry source who spoke to businessline on the condition of anonymity, said, “Anybody who is selling the company in the current market is selling out of desperation. It is not a good market to sell, and people are not getting high valuations as they did six months ago. So the motivation to sell in this market could be either a lack of company growth, not being able to raise funding, and so on.”

Commenting on the growth in M&A activity, Ankur Bansal, co-founder and director, BlackSoil, said, “One of the reasons for this would be the squeeze on funding that has led to putting runways under pressure. This has led to integrating with a major/fellow player in the market in order to survive in the market. Another fuelling factor is strong balance sheet companies acquiring their competitors or leaders in different verticals. This in turn leads to a wider reach and access to already established verticals without the need to raise funding and sett one up from the ground up.”

Edtech sees hightened M&A activity 

During the lockdown, innovative and adaptive companies were successful in raising multiple rounds of funds due to their unique propositions. However, gradually, the same companies were unable to justify the use of their funds, leading to stress on cash flows. 

“This trend opened doors for M&A activity in the start-up sector in late 2021 and 2022. Hence, sectors that did exceptionally well during the lockdown, namely edtech and food/retail tech, but as things are going back to normal, they are witnessing heightened M&A activity,” said Vijetha.

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Nawka also noted that apart from one significant funding deal in edtech this quarter, there has not been much fundraising activity in the sector. The slowness in edtech funding will lead to increased M&A activity in the sector in the coming months. The $225 million raised by upGrad and the $35 million round in Sunstone together made up 85 per cent of the total deal value of edtech deals this quarter.

M&A activity to grow

Industry experts expect the ongoing funding winter to continue till the April-June quarter of 2023, which will in turn accelerate the startup M&A activity in the coming quarter. Indian startups raised $3 billion in Q3 2022 (July-Sept), which was 57 per cent lower as compared to the previous quarter and 80 per cent lower than Q3 2021 ($14.9 billion), according to Tracxn Geo Quarterly Report: India Tech Q3 2022.

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“We are expecting M&A activity to increase in the next quarter. When the funding is drying out, people initially standoff as long as they can, trying to get a bridge round or raise debt, etc. But eventually, if they run out of cash, they will be able to retain value through M&As. So the prospect of larger M&As will continue in the coming quarter,” said Nawka. Further commenting on the quarter-specific M&A activity, Nawka said that Q3 2022 recorded 30 M&A deals as compared to approximately 80 deals in the same period last year.  

He noted that a lot of these 80 deals at the peak in Q3 2021 happened because of the tharasio model companies (like Mensa, Upscalio, and others) where people went on an acquisition spree. These companies have now slowly tapered out because they are less aggressive on acquisitions and are now conserving cash to absorb the acquired companies.