In a radically changed world, characterised by uncertainty, geopolitical instability, shifting consumer preferences and accelerated digitisation, there is a heightened need for agility and adaptability to remain relevant. Businesses are showing signs of adapting, be it embracing technology, diversifying non-core businesses, tapping new markets through acquisitions, divestitures and fundraising.

All this has led to a flurry of deal activity, most recently characterised by the number of big-ticket mergers taking place. Companies are also forced to react more quickly to competition by consolidation in order to capture a share of the pie, especially in the retail and consumer technology sectors.

Year 2021 witnessed a remarkable spike in deal activity, outperforming 2020 by 40 per cent in terms of value and 60 per cent in terms of volume. PE claimed the lion’s share of deal activity in 2021, contributing 57 per cent by value and 61 per cent by volume, while M&A contributed the remaining 43 per cent by value and 39 per cent by volume.

It is anticipated that the trend of outbound acquisitions will continue in 2022 as companies will continue to be on the lookout for acquisitions in the overseas markets to foray into new markets, expand their portfolio and acquire complementary business capabilities

Demand and supply

There are few things which are playing out for India inc. which are helping to increase the speed of M&A and other transactions. On the demand side we saw that in 2020 a lot of companies went for cost cuts to reduce overheads and increase efficiency. That led to a high availability of cash with these companies.

Therefore, we have a set of companies in the country which have got cash available for expansion. 2021 was the year when people started investing in growth. So, both from a mindset perspective and funds perspective, companies were ready for growth. Also, they have capital and there is also a low interest rate regime.

On the supply side, a challenge has been a lot of companies after Covid-19 were not able to improve their situation and, therefore, are still struggling. They now want to get out of the business or they need to find an entity to take over the business.

Also, what we have seen with some of the Indian promoters is they are now amenable to selling out so that speed has also increased. These macro factors on the demand and supply sides are driving the pace and volumes of transactions in the market today.

Drivers of M&A

India Inc can be divided into two parts. One is the older companies which have learned to do business in new ways and new environments and they are becoming stronger and stronger. So, we can see a number of acquisitions driven by larger corporates in India and this is a theme which will continue.

The second aspect is regarding India’s unicorns — many are doing one deal a month and they are relying on M&A to propel their growth. So that is the second set of serial acquirers you would see in the market. These are two aspects to note from the sell side.

From the buy side, we will see companies which are in stress, their numbers would increase. We can also see “living dead” companies, which are basically funded by PE funds and have gone nowhere. They will try to find a suitable home, which may be a larger PE funded company.

We can expect to see increased IPO traction — it doesn’t seem like there would be a slowdown there. We will continue to see robust growth rates and there may be some hiccups as we have seen in the last couple of months, due to global macroeconomic trends, but broadly the trend is positive. On the corporate side, we can expect the strategic shift to digital, innovative and new disruptive business models to continue to drive M&A decision-making.

The writer is Partner and Deals Leader, PwC India

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