Mergers and acquisitions in the startup segment saw a steep fall over the last couple of years coinciding with the surge in the public markets, though that trend could change if the equity markets do not reprise the performance of previous years, experts said.
The number of M&As involving startups fell over 42 per cent on year in 2024 while the fall was over 70 per cent from 2022, according to data from Inc42.
One of the factors for this steep fall was the easy availability of public capital and the success of the capital markets, according to Bharat Anand, Senior Partner at Khaitan & Co. “Many deals that would have led to M&A transactions over the past 12 to 18 months have instead shifted to capital markets. Companies with Rs 500-1000 crore revenue are now able to list easily, reducing the need for secondary sales or buyouts,” he said.
Last year saw 38 startup IPOs compared to 21 in 2023, according to Tracxn data, testifying to the easy exit opportunities available for companies. The year just gone was also marked by a small but still significant rise in startup funding compared to 2023 but still well below the levels seen in previous years.
Anand cautioned that the M&A data has to be analysed alongside capital raising trends. “If fewer companies are being bought and sold, it could be because they are securing capital to grow. When companies are in a growth phase, owners are less inclined to sell. If capital raising is steady or increasing, it explains lower M&A.”
M&As not only serve as an exit for investors and take money off the table, but they are also growth strategies for the companies concerned. Private equity and venture capital-backed companies often adopt a ‘buy and build’ strategy, acquiring an initial entity and then expanding by acquiring competitors in the same sector.
Some of the prominent M&As seen last year was that of food aggregator Zomato buying Paytm’s entertainment ticketing business Paytm Insider to expand its ‘going out’ business, hospitality firm OYO buying Paris-based premium rental homes company checkmyguest, Fullerton India buying controlling stake in cash-strapped fintech lendingkart, Freshworks buying US-based Device42 and so on.
M&As also provide promoters and investors the opportunity to exit or save a struggling venture. “In today’s market, without a robust business case for value unlocking or synergies with the buyer, a target is unlikely to get a great valuation. It could be an exit strategy for shareholders of businesses that don’t have a strong business case but have been able to build some sort of asset like customer base, brand etc. These businesses may struggle to raise funds in the current scenario and aligning with a strategic buyer, at a practical valuation will be their best option,” said Ashish Bagadia, Partner, Corporate Finance and Investment Banking, BDO India.
Global uncertainties and the relentless selling by foreign investors has put pressure on the Indian equity markets and public market exits may no longer be so attractive. The Nifty50 has slipped 2.4 per cent year-to-date.
Outlook
The trend will be similar to what we have seen in tightening phases of the previous capital cycles, said Nagadia, adding that the sellers will take a wait and watch approach for some time and may take another 6 months to align with new norms.
At this point in time, we are in a buyers’ market and valuation expectations in M&A will have to be recalibrated.
“We expect the M&A activity to pick-up from hereon,” he said.