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Distress sales to accelerate mergers and acquisition deals in the second half of 2020

Written by Moulishree Srivastava Published on   6 mins read

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M&A deals in India fell by 28% in the first half of 2020 compared to the same period last year.

As India Inc. weathers the COVID-19-induced slump, mergers and acquisition (M&A) activity has slowed down in the world’s second most populous country. However, experts believe the distress across the sectors would cause M&A deals to pick up in the second half of the year.

According to the data collated by business intelligence firm Tracxn, M&A deals fell by 28% in the first half of 2020 resulting into 67 such deals compared to 93 in the same period last year.

While most of the sectors saw a dip in the M&A activity, education technology was the only segment that saw M&A deals almost double to seven in the first half of 2020 from four last year in the corresponding period. Edtech startups started the year on a high note with multiple high ticket investments, and despite slow economic activity added thousands of new users during the lockdown in India. The online education space is also the only segment that is expected to see consolidation due to increasing competition, rather than distress.

Apart from edtech, sectors such as consumer, enterprise applications, and retail were among the top four segments that witnessed the most M&A activity happen. While consumer space saw 15 M&A deals in H1 2020, as compared to 20 in H1 2019, the enterprise application segment had 14 M&As in the first half this year versus 26 deals in the corresponding period last year.

Retail space got seven deals in its ambit in the first two quarters of the year, the same quantum as the last year.

Stress building up in the market

Analysts and investors believe as companies try to survive during the COVID-19-induced slump, it gives an opportunity to large corporations and bigger startups that might be looking to take new technologies or services under their wings. With valuations going down, they believe bigger companies in the second half of the year would explore more acquisitions.

Anil Joshi, managing partner at Unicorn India Ventures told KrASIA, he expects the M&A activity in the country to increase since many companies would be available to get acquired at the right price.

“More and more opportunities will be available due to unavoidable circumstances because of the current situation, as many people are finding it tough to sustain their business,” he said. “I think the situation for many companies would be either to shut down, or get acquired and live.”

However, he said, many acquirers are still waiting for deal prices to drive down. “Currently, we are seeing some slack, because people are expecting that prices probably may go further down because of the unclear situation and lockdown being extended in many places.”

Startup

Read this: Indian edtech startups open up path for consolidation

As such, there are estimates that hundreds of startups have shut down as COVID-19 takes a toll on their operations. As per a report by local media Mint, which cited another Tracxn data, more than 250 startups have already shut shop over the past two months.

This is in line with the industry body Nasscom’s Q1 survey, which found that 70% of over 9,300 technology startups had less than three months of cash runway as they struggled to raise money due to COVID-19. It said 30-40% of them had halted the operations or were on the brink of shutting down. The investors’ fraternity also feels there may be more casualties in the coming months.

Meanwhile, the funding scenario hasn’t been as robust as last year. In the first six months of this year, 443 Indian startups raised a total of  USD 4.2-billion, compared to USD 5.9 billion raised by 725 startups in the corresponding period last year, as per Tracxn.

It is worth mentioning that the companies that raised bigger rounds largely included unicorns—companies valued over USD 1 billion or more such as Zomato, Swiggy, Oyo, and Byju’s—and soon-to-be-unicorns like Unacademy, and Vedantu. Meanwhile, the early-stage checks primarily went to tech startups that are building solutions for the post-COVID-19 world. This left a large chunk of early to growth-stage startups affected by COVID-19 with little to no money in their bank account.

This, in turn, is going to result in stress deals, wherein startups would be forced to get acquired or acqui-hired, industry experts believe. More importantly, they said, investors are likely to push for strategic acquisitions of their portfolio companies, even if it means striking a lower valuation deal, as long as they get an exit and get some return on their investment.

Many industry veterans feel that corporate companies including Reliance-owned Jio Platforms, that has raised billions of dollars, might eye acquisition opportunities to help its digital India vision.

Adapting to new-age technologies and scaling up operations were some of the factors that drove consolidation in India last year, according to a December 2019 report by consultancy firm PwC. The report stated that 2019 recorded domestic (M&A) deals worth over USD 21 billion, which accounted for over 57% of the M&A deal value, adding that the consolidation would likely to continue to be a key driver for deal activity in 2020 as well.

Typically, there’s an increase in M&A activity when there are multiple players of big and small size, such as in the case of the online education segment in India. Flushed with investors’ money, edtech giants Byju’s, Unacademy, and Vedantu are already in the fray to take over smaller, niche edtech startups in their bid to grab a larger pie of soon-to-be USD 3.5 billion online education market.

Read this: How Indian family offices are looking to tip the balance of local venture market

Companies also indulge in M&A activity when they want to either add in a capability or plug a gap in their services. For instance, Bigbasket acquired milk delivery platform, DailyNinja, in March to strengthen its dairy segment. Similarly, gaming and sports media company Nazara acquired a majority stake in fantasy gaming platform Halaplay, an online fantasy platform last month.

Moreover, as more startups run low on cash as they struggle to raise a fresh round of funding, M&A activity is likely to go up. Earlier in June, Bengaluru-based Merak, a machine learning-based documents and data digitization solution provider, was acqui-hired by edtech startup ClassPlus.

Karthik Reddy, co-founder, Blume Ventures told local media Livemint that four of five Indian unicorns have asked the firm whether they have any good companies to offer them, which fit in their general interest areas.

The area of interest

B2B segment is one of the sectors that usually sees more M&A activity than others, and Joshi feels the activity in the segment will only go up in the second half. According to him, sectors such as agritech, logistics, and transport as well as hospitality, commercial real estate, and restaurants will likely see rise in M&A activity towards the end of the year.

Indeed, real estate, hospitality, and food-tech have been hit the hardest. As more companies in these segments run out of money, distress deals might start to pick up. The data collated by Tracxn shows that there were four M&A deals in real estate and construction tech in H1 2020, while H1 2019 saw only two such deals.

Jaideep Dang, managing director, Hotels & Hospitality Group, India, JLL told KrASIA, the M&A activity in the real estate sector that almost came to a halt in the first half, is expected to revive by the end of the third quarter.

“In the first half, everything paused, because nobody knew what hit them and everyone was stretched to cut costs in order to survive,” Dang said. However, he said, “the projects with excessive debts and the projects that have not stabilized yet, such as new hotels that came up last year or just before COVID-19, are in the market looking to raise money through M&A.”

“Such conversations have started, and we believe, not only India but across Asia, the M&A (in real estate) will begin towards the end of the third quarter,” he added.

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