NEW DELHI: Mergers and acquisitions (M&A) are near their highest-level ever in India, led by more first-time buyers and mid sized deals rather than the $5 billion plus deals that drove activity in 2017-2019, says a new report by Bain and Company's.
According to the report titled 'India M&A: Acquiring to Transform', first-time buyers have accounted for more than 85 per cent of the deals closed in 2020 and 2021— up from less than 70 per cent through 2017 to 2019. "More companies doing more deals also means average deal size is now smaller, with fewer $5B+ megadeals and more deals in the $500M–$1B range," it said.
There were 85 strategic deals valued at more than $75 million in 2021, out of which the percentage of first-time buyers is 84 per cent. There were 80 strategic deals valued at more than $75 million in 2020, out of which the percentage of first-time buyers is 87 per cent.
Who is driving these acquisitions?
46 of India’s 69 unicorns have been added in 2020 and 2021 alone, and these start-ups are driving disruption across all sectors, from finance to retail to technology, said Karan Singh Partner at Bain and Company, New Delhi.
M&As by these startups and digital insurgents have hit never-seen-before highs as they shop to build scale rapidly, enter new geographies, enter new lines of business.
For example, edtech insurgent BYJU’s has been on a $2 billion plus acquisition spree, with 11+ acquisitions—of which approximately $1 billion went towards acquiring Aakash Educational Services, an offline test prep company, to build an omnichannel learning offering for its test-prep vertical.
Oyo has been making several acquisitions globally to enter new geographies.
PharmEasy, India’s leading e-health player, has made multiple acquisitions to enter new verticals, including a 66% stake in Thyrocare to strengthen its high-margin testing vertical.
Where is the money?
Two thirds of deals done by insurgents are stock-plus-cash transactions. Corporate cash reserves and foreign direct investment inflows are at their highest-ever levels, private equity (PE) is also available, and interest rates are at a 10-year low. Armed with this capital, companies are on an acquisition spree.
Which sectors are investors betting on?
Private equity investment momentum had a massive spike in the first half of 2021, with a 2x increase over the same period in 2020 (excluding investments in Reliance Jio). Consumer tech, IT and ITES, and BFSI are hotspots for investments
"An emerging theme is financial investors rolling up multiple deals to build platforms. For example, Carlyle, Bain Capital, Advent, and PAG have all made multiple investments across a number of active pharmaceutical ingredient (API) players to build out API platforms. In addition to PE, venture capital activity also saw a 3x spike in H1 2021," said Vikram Chandrashekhar, Partner, Bain and Company, New Delhi.
Bain believes digital and environmental, social, and governance (ESG) are long-term value creation hot spots over the next decade, with the increasing focus of major economies on achieving net zero emissions and the omnipresence of digital.
Even conglomerates like Tata and Reliance are reshaping portfolios through divestitures and acquisitions
Several Indian conglomerates are overhauling their portfolios through M&A, betting on profit pools of the future such as digital, renewables, electric vehicles, consumer, and fintech. At the same time, they are pruning ownership in legacy assets, or in sub-scale positions which could be more valuable to another parent.
For example, Reliance has been aggressively growing emerging businesses through M&A, with recent acquisitions in retail, digital, and renewables.
The Mahindra Group has reshaped its portfolio and exited loss-making businesses, with multiple divestments including a potential divestment of its stake in SsangYong.
The Tata Group is actively reshaping its portfolio and has done over 20 deals in the last two years, including multiple acquisitions (BigBasket, 1mg) to build its super app.
India is emerging as a hotspot for renewable energy
An ambitious and supportive policy commitment and falling prices have made India a hot spot for renewable investments for both domestic and global players. The Adani Group—India’s largest private thermal producer and power transmission company—has set a vision to become the world’s largest renewables company by 2030. In line with this vision, Adani has already made five deals in the renewables space in the last three years, including India’s largest renewables deal, worth $3.5 billion, to acquire SB Energy India. Significant inbound M&A activity has also been underway by multinational corporations buying into Indian renewables over the past 24 months. For example, Thailand-based Global Power Synergy acquired an approximately 40% stake in Avaada Energy.
Cross-border M&A strong
Apart from renewable energy, there has been inbound interest in infrastructure, including real estate and roads. On the outbound side, IT services companies are acquiring new capabilities. For example, Infosys acquired Simplus, a US-based Salesforce consulting company, to strengthen its presence in the Salesforce enterprise cloud solutions and services provider space.
Wipro strengthened its banking and financial services vertical by acquiring a global management and technology consultancy company, Capco, that specialises in the banking and financial services industry.
"Our research clearly indicates that winners reshape portfolios in times of turbulence. During the 2008 financial crisis, Indian companies that acquired or divested outperformed their peers 2:1 in earnings before interest and taxes (EBIT) growth over the next five years. The winners of tomorrow are acting today to reshape their business...Done right, scope deals can unlock tremendous value—as in the case of Tata Consumer Products, which generated 76% excess return above the SENSEX," said Chandrashekhar and Singh.
