M&A deals climb up as startup funding begins to slow

Mumbai/Bengaluru: After domestic startups saw an unprecedented funding boom last year, there is a rush to acquire smaller players as the financing market softens.

Consolidation is also trending as many of these startups are unable to shore up the battle chest to battle larger and more well-capitalized rivals.

Dozens of unicorns – privately held firms with valuations of $1 billion or more – and soon the companies have been acquired or are in the process of buying out the firms.

It aims to gain market share, link revenue streams and gain access to technology, geography or talent, according to at least half a dozen industry experts, investment bankers, fund managers and founders.

Beauty and personal care firm The Good Glam Group, fintech startups Cred and Razorpay, edtech player Scalar, and online used car selling platform Spinny have been acquired, among others, while others such as ride-hailing firm Ola, Business-Two Business commerce startup of business and fantasy gaming platform Dream11 is in the process of acquiring companies.

Some of the notable recent acquisitions have been the mobility sector deal with Chalo-Vogo and a slew of buyouts by The Good Glam Group.

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Big deals like the Zomato-Blinkit (formerly Grofers) deal are still in the works and are yet to be formally announced.

These deals have also been triggered by a massive recovery in the funding market, where companies that are being acquired were unable to raise additional cash or were hit by the COVID-19 pandemic.

Cred’s acquisition of online investment platform Smallcase and Razorpay’s ongoing talks for a possible acquisition of EzTap are on the consolidation topic for the industry as a whole.

Dealmakers involved in these transactions said that the market always witnesses consolidation after a surge in funding, where the big players look for M&A targets amid the liquidity crunch.

“An interesting trend is that companies with technical valuations are looking to go for offline models with solid cash flows. Conversely, offline companies are also looking to build their online distribution, but usually cannot match the valuation expectations of vendors, with few exceptions,” said Pankaj Naik, executive director and co-head, digital and technology, Mumbai-based Avendus Capital said. Investment banking firm.

According to data from industry tracker Tracxn, acquisition activity reached 123 deals in the first quarter of 2022, compared to 70 deals in the first quarter of 2021. These include target companies that were established after 2010.

Quarterly M&A Activity_Graphic_ETTECHETtech

Interestingly, with many startups raising capital at record-high valuations, companies are under pressure to justify their new valuations as they plan for future funding rounds.

“I think valuation multiples have increased for many companies over the past year, and startups are looking to play catch-up through acquisitions. If you have to grow your next round, you have to show growth, and startups are now looking to grow their own business.” We are resorting to inorganic growth through mergers to enhance the proposals,” said an investment banker who has been assisting large startups to acquire businesses on growth.

The banker said that about 60% of the focus is now on acquisitions rather than fundraising.


easy target

As the funding winter begins globally, smaller players struggling to raise cash and grow meaningfully are becoming easy acquisition targets for well-funded startups looking to inorganically fuel their growth ambitions. want to complete.

Top M&A deals this year_GRAPHIC_ETTECH (1)ETtech

“The post-merger world can be tough. Ashish Kashyap, founder and chief executive of wealth management company IndMoney, said, “Several acquisitions in the early and growth stages can derail the company, the results of which are not so exciting.” “I think companies have to be in the right economics to be able to digest and integrate their assets into an acquisition or something.”

Kashyap previously founded online travel portal Goibibo and also led the acquisition of RedBus by the Goibibo Group in 2013, one of the largest acquisitions in the travel-tech space during that time.

Vamsi Krishna, cofounder and CEO of edtech startup Vedantu, said, “I am confident that in this market cycle assets or startups are available at affordable prices… we will see greater consolidation for the larger ecosystem over the next 12 months.”

The pandemic-induced push for digitization helped some companies grow rapidly, while others struggled to recover from the business they experienced due to the lockdown and changing consumer behaviour.

Chalo has a case for the acquisition of Vogo, which was battered by the pandemic.

Last week Chalo announced the deal, saying that Vogo would add to its bus technology services by offering first and last mile rides at major bus stops and other public places.

share-swap

Given that most companies are using their stock to acquire smaller shares, investors in target companies are also happy with the overall result because they get a smaller stake in a high-growth company.

TOP AREA FOR M&A ACTIVITY____GRAPHIC_ETTECHETtech

“It’s not like a share-swap is better on the balance sheet, because you still have to create value for investors. But obviously the advantage of a share-swap deal is that you’re bringing in the company’s ‘game’. The skin is also there and keeps both the entities on a similar path,” said Kashyap of IndMoney.

While the focus of acquisitions this year has largely been toward new expansions, many acquisitions have also focused on acquisitions for tech teams.

“The other open secret is that hiring engineering talent has been really difficult, and tuck-in acquisitions have been a great way to grow technical teams,” said Vaibhav Agarwal, partner, Lightspeed Venture Partners.

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