M&As among small firms gain traction

They may not be big-ticket. Nor do they garner attention but acquisitions are certainly on the anvil for many small & medium enterprises, especially since the downturn, say industry experts.
And the reasons are manifold.

India’s 14 lakh SMEs were the worst hit during the slowdown because they contribute over 45% to the country’s exports, which dropped when the global markets went into a tailspin.

Expansion plans were put on hold and plants were operating way below their optimum levels. Many were even up for grabs. But, according to Gaurav Marya, president of Franchise India, a consultancy for SMEs and big corporates, firms did not have the money to buy them.

“But lately, there has been a tremendous amount of interest,” he said. Franchise has done about four deals in the last six months, two of them involving large retail firms buying out franchisees, two involved an SME acquiring a sick unit of another. The latter deals, in the retail and education sectors, were worth $2-5 million. Marya did not wish to disclose names.

“We are close to finalising a $5 million deal and we have 15-20 in the pipeline,” Marya added. Half of those deals are SMEs acquiring one another.

There is no aggregated data available on acquisitions in the SME space, given its vast size and unorganised nature.

Manish Bang, director, Expanza Access, a consultancy in Mumbai, said buys among SMEs were worth Rs10-50 crore. “One reason for the interest in acquisitions is entrepreneurs prefer acquiring an existing plant to putting up a new plant,” he said.

Thane-based entrepreneur Dharmu Vanjani is planning to do just that. As managing director of SS Natu Plastics & Metals, he is preparing to buy an existing unit outside Mumbai to expand production of his green fans and motors and is working out the costs. He said many foreign companies were setting up base here either through tying up with a local firm or by taking over a plant here due to the impending appreciation of yuan once China loosens control on exchange rates.

“That will make India a cheaper destination to produce in. One of my clients from Singapore has just bought a unit here,” Vanjani said.

NA Raghu, a Chennai-based consultant & businessman, said the companies he had worked with chose setting up new units close to their existing ones than take over a unit at a distant place to avoid huge transport and overhead costs. “Even labour becomes a problem when you have facilities in multiple locations,” Raghu said. His Rs 15 crore-firm, Technoplus Services, does boiler and energy audits for power plants.

When it comes to firms going on the block, sickness is not the only reason. There is the also problem of generational gap between the founders and their children or grandchildren. “They go to B-schools and don’t like the way businesses are run so the families decide to sell them off,” Bang said. Expanza has nearly eight deals in the works.