Deal market acquires taste for digital: Recent M&As, with conglomerates in fray, pose unique competition challenge

This has drastically enhanced user engagement and experience.

By Vidhisha Vyas & Sweta Agarwal

Covid-19 has corroborated the widely held belief that technology will completely transform business functioning, and digitisation is the way forward. The first two decades of the 21st century witnessed an increased use of technology across business processes, but the pandemic has forced a paradigm shift in digital adoption for most businesses. There has been relatively high investment or M&A, driven by private equity, venture capitalists, or otherwise, in the digital space.

The laggards in the adoption of digital assets have been forced to keep pace with the competition, and, hence, are eyeing acquisition of digital assets as the fastest way to build capabilities. The first half of FY21 saw deals that strengthened acquirers’ digital capabilities, kept emerging threats at a distance and led to the consolidation of the market in the digital asset.

As per Bloomberg data, out of 997 deals amounting to a total of Rs 6,93,776 crore announced in the first half of the financial year, the reigning sectors were e-commerce, IT, retail, consumer, fintech, OTT and ed-tech, where digitisation is the ruling strategy. Digital M&A activities have turned out to be a key approach for cash-rich firms’ growth journey.

In times of minimal treasury income due to subdued interest rates, acquiring cutting-edge capabilities at low valuations has proved to be a far more judicious move over a self-build model, especially when it offers swift entry into previously neglected and ‘out of comfort zone’ segments. Big IT firms, like Wipro, Infosys, Tech Mahindra, and HCL, have been acquiring cross-border firms to enter new products and markets in the digital technology space.

Infosys acquired Kaleidoscope (US-based) for its digital product design and development, Wipro acquired a Brazilian IT-digital solution provider, Tech-Mahindra acquired a US-based cloud development company and Cognizant acquired around four digital companies in the US. The deals being in client countries also safeguard the acquirers against any future work visa laws issues.

On the domestic front, deal values in the telecommunication sector have been particularly noteworthy. It grew 220-times in comparison to last year, mainly due to high-value inbound deals of Facebook and Alphabet (Google’s parent firm) with Reliance Jio. Google invested $4.5 billion in Jio and would soon be developing a low-cost Android phone for the company.

The deal offers Google not only an opportunity to gain access to new users that would be using internet for the first time but also to test its low-cost smartphone strategy. Facebook’s deal with Jio for $5.7 billion was aimed at capitalising on the growing roots of the e-commerce industry in India.

In sectors like consumer goods and retail, where success is dependent on distribution supported by resilient supply chain and brand names, many conglomerates with deep pockets are looking to acquire strong local brands struggling for funds.

The Tata group is scouting for potential deals in hyperlocal space, ranging from staples to fresh grocery to e-pharmacy, which can be added to its ambitious super app. Reliance’s acquisition of Urban Ladder at a valuation of a mere Rs 190 crore shows the group’s intention towards digital and new commerce initiatives. It widens the bouquet of consumer products offered by the group. This has drastically enhanced user engagement and experience.

Start-ups which were going strong in the pre-Covid scenario and were reluctant to go for M&A have started exploring the same due to a decline in private equity and venture capital investments. Sharp fall in funding, by as much as 75%, in various sectors (largely in fintech) is leading to consolidation. Amazon has acquired stake in fintech firms like BankBazaar and Capital Float. On the other hand, fund-deprived Bigbasket, India’s biggest e-grocer, facing fierce competition from Reliance Jio Mart and unable to get fresh investments due to the present geo-political scenario, is evaluating stake sale option.

Venture capitalists, after losing money in B2C start-ups during the pandemic, have started preferring B2B start-ups. This has led to an intensification of deal activity in the B2C digital start-up landscape. Recently, IndiaMART acquired a 9% stake in Mobisy Technologies .

Online education saw maximum traction due to pandemic, and with the implementation of new education policy, ed-tech is expected to remain relevant for a longer time. In six-month’s time, BYJU’s valuation has already increased tremendously. It has joined the deca-corn club. Ed-tech start-up, Eruditus, which focusses on executive education, has raised $113 million in funding. Unacademy has acquired five ed-techs firms, Mastree, Prepladder, CodeChef, Kreatryx and Wifistudy, to strengthen its market.

The sector is now expected to experience consolidation led by venture capitalists for better returns. As has been the case in e-commerce, ride-hailing, and food aggregation, they will also be pushed for M&A by investors to reduce competition and enhance market share.

The increased deals in the digital space have made Competition Commission of India more vigilant, and it has been working on not only developing an outlook on resulting competition and market trends but also to take appropriate measures to protect offline business interests. In such a scenario, the firms undertaking M&A need to consider the unique characteristics and challenges of the deals.

They should think strategically about aligning their digital agenda with that of acquired assets and keep a sharp eye on the resulting competition along with terms of the deal, and possibility of cyber-attacks. Still, the coming days would be exciting in terms of weeding out the competition, acquiring technologies, pivoting business model and consolidation in digital space.

Vyas, associate professor, IILM University, Gurugram and Agarwal, assistant professor (senior), Lal Bahadur Shastri Institute of Management, New Delhi

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