Great expectations: Why M&A deals fall apart

Mergers and acquisitions (M&As) are integral to the start-up ecosystem. However, the last few months have witnessed prospective deals coming to a dead end. Merger talks among Swiggy-Zomato, Swiggy-UberEats India, Bigbasket-Grofers and the very infamous Snapdeal-Flipkart, all collapsed before reaching fruition.

Experts say besides taxation related issues, valuations could be the most likely reason.

Sanjay Swamy, managing partner, Prime Venture Partners, says typically M&As are of three types. “The acqui-hires done mainly for the talent and for some technology, like Facebook’s buyout of LittleEye Labs, which was in the $12 million range. Then there are strategic M&As done for the technology and initial market access, like ZipDial getting acquired by Twitter, which was in the $35 million range. And lastly, large M&As to enter new markets. Like Snapdeal buying out Freecharge, which was in the $400 million range. Larger the cheques, fewer are the companies capable of writing them and the more careful will a company be.”

M&As are crucial for the ecosystem as the deals are said to propel a newer crop of entrepreneurs and ventures, fuel more ideas and business models, and spur further rounds of investments. Moreover, besides wealth creation for the founders and the investors, M&As reflect upon the maturity of the ecosystem as not all start-ups can grow to become strong standalone entities, believe experts.

M&As are also said to consolidate the market and transform the combined entity into highly valued brands. “The Flipkart-Myntra-Jabong combine or the MakeMyTrip-Ibibo combine have established themselves are global brands with a rich bouquet of offerings, a strong consumer base and market share,” says Pankaj Karna, managing director, Maple Capital Advisors.  

In 2018, the total value of inbound and outbound M&As that involved Indian companies was a whopping $129.4 billion, as per data by Thomson Reuters. The acquisition of Flipkart by Walmart for $16 billion was one of the most high-profile deals of last year.  

According to Karna, valuations are the key in any M&A transaction. “But what really drives a transaction is the combined view of the target valuation, relative valuation in case of a merger, the synergy value and the cost of market share/market entry versus build case. While the Snapdeal-Flipkart merger fell through on valuations and the Walmart-Flipkart one went through, it would stack up if valuations are seen in conjunction with other aforementioned aspects.”

Do cross-border M&As also falter owning primarily to valuations? Experts believe international firms are relatively valuation insensitive. 

“They would rather overpay in a hot market than get a good deal in a cold market,” says serial entrepreneur Bala Parthasarathy, CEO and co-founder, MoneyTap. 

“Acquirers mainly look for a fast-growing market where they find long-term opportunities for themselves to establish leadership. Second, they see whether they should build or buy. If the market is fast-moving, building usually gets ruled out since it takes time. Third, acquirers look for local players who fit within their culture, product-direction, team strength and existing market position. If all of these boxes are checked, then they look for the better deal. If there are multiple such companies, an acquirer pits one against another and tries for a good deal. If there is one clear leader, like for example Flipkart, then the acquirer will pay whatever it takes to acquire,”  Parthasarathy adds.

However, experts still have a word of caution for entrepreneurs and start-ups. Says Swamy, “My advice to founders is to keep their valuations realistically close to the state of the business, as that always keeps future rounds of financing and attractive exits as viable options at all times. Do not raise onto the hype. Remember, every time you raise a round of funding, you are cutting out some M&As options.”