Post-Covid, we'll see big-money M&As

The coronavirus outbreak has significantly impacted economic activity. The pandemic has left stock markets bleeding and debt markets shunned. Investors, stakeholders and deal-makers are all desperately seeking ways to beat the crisis and experience economic growth and financial gains. The boom in the M&A deal market last decade, which witnessed several mega transactions, have come to a halt. It is now exhibiting the traditional behaviour seen during economic crises (see charts)

However, everything is not lost in this new age era of start-ups and cash-rich companies. There are opportunities for M&A activity, with strategic deals leading the game.

Structural shift in M&A

In unprecedented times, M&As turn cyclical in nature. However, post-pandemic, a structural change is expected. Despite the RBI’s effort to push borrowings by reducing interest rates, corporates are unwilling to venture into organic growth. A recent Nasscom e-survey underlines that 90 per cent of the start-ups have lost their revenues due to lockdown. Their cash reserves are depleting, operating costs piling, and supply chains disrupted. Funding options for them are bleak as investors and venture capitalists are looking at ways to exit and cut losses from non-profitable enterprises. Cash crunch and lack of accessibility to new and large markets have made them ready targets; one may see several distress sales in the coming months.

But it seems that one man’s loss is going to be another man’s gain. With all-time low valuations, large companies will seize the opportunity to grow inorganically and prefer the buy over build model. Seasoned business houses would look for cheaper targets in tech and innovation-driven sectors. Cash-rich companies that missed novel business opportunities last decade and foreign companies looking for a foothold in India will aggressively go for these beleaguered ventures.

Reliance industries, for instance, has already made 49 M&As, strategic investments and joint venture deals in the last one year and is eyeing many more in the upcoming quarters. It has bought Haptik, Embibe, Fynd and is now targeting Netmed, a health-tech firm. The Adani group is eyeing energy tech start-ups. Amazon recently increased its stake in Capital Float, a fintech firm.

Start-ups and MSMEs operating in crowded spaces and unable to gain scale economies, but which have made impressive strides in areas such as pharma R&D, logistics and tech/cyber security , will be the targets. Small companies in the IoT and AI space are already attractive targets for large firms.

Recently, Airtel bought a stake in Gurgaon-based artificial intelligence-driven start-up Voicezen. Cipla acquired a stake in GoApptiv, a digital solutions provider for the healthcare industry, to expand its reach in Tier-3 towns. Banks are also aggressively looking for fintech firms to enhance their reach and efficiency. Recently, ICICI Bank invested in Auxilo Finserve, an NBFC start-up which supports the education ecosystem.

Mergers and acquisitions, despite being lucrative opportunities for inorganic growth, are not free from challenges. Currently, comparable transactions may not provide the right yardstick for valuation, and greed to buy cheap will make the negotiations tougher and result in non-completion. Effective due-diligence owing to lack of proper reporting and complete information on various start-ups would be a daunting task for acquirers. Arranging funds for a deal will depend on liquidity and market conditions.

Unicorns are reluctant to take bets on horizontal deals. The ones that are thriving in these Covid times, like Byju’s, BigBasket and PolicyBazaar, are hesitating to consolidate and are inclined more towards exploring the possibility of organic growth. Anti-trust regulators are also keeping a close watch on the market and may pose difficulties for unicorns to merge.

In the past also, companies like Ola, Uber, Swiggy and Zomato, despite considering mergers, did not proceed with the deals. The Competition Commission of India has been closely watching IoT, ed-tech and Internet-based firms, putting prospective buyers on the back-foot.

However, the majority of the deals concluded in this quarter were already in the pipeline and had been firmed up before the Covid outbreak. Also, with the governmentin April insisting on its approval for any new investments from South-East Asian nations, it may be difficult to get fresh Chinese investments. Nevertheless, the hope of revival is still there and, therefore, the M&A market needs to be closely watched over the next few quarters.

Sweta is Senior Assistant Professor (Finance Area), Lal Bahadur Shastri Institute of Management, and Vidhisha is Associate Professor (Economics and International Business), IILM University

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