How Corporates Can Leverage Startup M&As To Drive Growth

Must read

Indian corporates have effectively utilised mergers and acquisitions (M&As) to drive growth and create scale, both domestically and globally

M&As have been successful in sectors where global presence provides a competitive advantage, such as IT services, pharmaceuticals and auto-components 

M&As have led to supply chain efficiencies, improved customer access and higher quality standards in various sectors, benefiting customers in terms of choice, availability and improved distribution reach

Indian corporates have used mergers and acquisitions (M&As) as a strong tool to drive growth over the last two decades and, in the process, created scale, both in domestic markets and, in some cases, in global markets. 

Since India has always been perceived as a growth market (vis a vis more mature earnings-oriented western economies), acquiring growth and scale has always been the prime objective. However, there have been several different rationales across various sectors, and some historical learnings can help us make a prediction on what has worked in the past and may work in the future.

We have examined the key rationales driving M&A decisions and how the strategy has aided in various sectors below.  

Key Rationales Driving M&A Decisions Across Sectors

Ability To Build A Global Footprint With On-Ground Operations Capability With Localised Teams 

In sectors where global presence is relevant, M&As have been a tool used by several companies by doing bolt-on acquisitions across several countries.  One common thread shared by successful M&A-oriented growth companies has been the execution of small to mid-sized bolt-on deals across multiple geographies, allowing them to derisk and reduce the likelihood of an unsuccessful single deal integration. The strategy has been utilised by the likes of Sun Pharma, Motherson Sumi Group and Tech Mahindra. 

Just to give a perspective on the consistency of using M&As as growth for certain corporates who have used it efficiently by doing bolt-on deals (global or domestic market), below are some data points:

No Of M&A Deals Executed Over The Last Two Decades (2000-2022)

Garner A Larger Market Share Of The Domestic Market & Move Up On The Ranks 

In several domestic categories, especially where market shares are fragmented, gains in market share help scale up presence. 

A key example here is the domestic formulations business in pharma. The leader (Sun Pharma) has a market share of 8.5%, with most players having less than 2%. In a market like this, an incremental 0.5% market share gain can make a material difference in moving up the ranks. 

Ability To Ramp Up Capacities Quickly & Crunch Time Of A Prolonged Green-Field Driven Expansion 

In several manufacturing sectors like cement and metals,  this has been well utilised. The build-up by the erstwhile Gujarat Ambuja Cements using acquisitions for the addition of capacities in regional markets (in which they were not present) is a good case study. 

This included buying Tata Group’s stake in ACC in FY 2000. The entire consolidated cement platform was later acquired by Holcim, and then by the Adani Group; the goal for each was to use M&A as a tool to obtain a large capacity in a single transaction. 

In a sector like education, acquisitions can help in several ways: geographical presence, capability (like an ICSE, CBSE, or IB curriculum), and access to some prime locations in key cities. KKR funding EuroKids and its expansion plans inorganically is a good example. 

Consolidation Has Eventually Helped Supply Chain Efficiencies And Customers Alike 

One of the constant debates has been whether M&As have helped the eventual customer. While there may be mixed views around these, there is data to suggest that the customer eventually benefits. Choice, access, and quality are critical parameters for a consumer. 

We have seen the creation of three API platforms recently. They are all led by PE funds. As a sector, API has been ripe for consolidation as the sector has several fragmented businesses. The consolidation and formation of larger INR 1,000 Cr+ businesses have resulted in improved efficiencies (and thus cost savings for buyers) and higher-quality standards being followed. 

In any B2C business, whenever a larger national player acquires a regional player, the distribution reach improves dramatically. For the customer, it has meant an improvement in availability and enhanced choices. 

A key example here would be Marico’s acquisitions of the three D2C brands (Just Herbs, True Elements and Beardo) which helped these brands penetrate the traditional physical touchpoints and thus cut down on time and effort. Another example is the acquisition of Badshah by Dabur earlier this year. Badshah would get direct access to 7 Lakh plus outlets of Dabur versus 80,000 of their own, besides the larger export footprint of several countries. 

In banking mergers in India, we have seen that in the long term, the customer has been a big beneficiary as the larger bank has more branches, better customer services and greater usage of technology. 

Source link

More articles

- Advertisement -


The New Pillars Of The Indian Startup Ecosystem

Traditionally seen as custodians of age-old assets, family offices were celebrated for their prudent investments As Indian startups seek robust growth avenues, the comprehensive...
- Advertisement -

Latest article