This article first appeared in the print edition of the magazine “People Matters” – Oct 2017
The Indian economy and businesses have seen a high-growth phase almost ever since this new millennium began, more so after 2003. This phase has even survived the 2008-9 Global Economic Crisis without too many scars to show for it. This piece will focus on the Imperatives behind M&As in Indian businesses and post-merger impact in different cases.
Two key imperatives for NEW businesses in fast-moving economies are completing their business models and acquiring scale, i.e., grabbing market share – both to be done as little time as possible. This is necessitated so that such companies can either build a sustainable competitive advantage, often referred to as a Strategic Moat in new start-up parlance, or become the 800-pound gorilla in a winner-keeps-all market. Helping them in this quest are venture capitalists and strategic investors, by funding them for the above pursuits. And the quickest way to do all the above three imperatives is to go on the inorganic route, i.e., to acquire or merge with other companies.
Let’s look at each of these two imperatives, with sub-components and with some examples if possible.
Completing the Business Model : Many of the M&As (mergers or acquisitions) have been done to acquire some line of business, which would complete the portfolio of sub-businesses that a strong company should have in that space. This may not necessarily be a diversification as the case used to be in older times, but could rather be acquiring a new product vertical or geography or even a customer segment.
New product lines or customer segments – Flipkart’s acquisition of Myntra, Amazon’s of Whole Foods or merger of PropTiger and Housing are all examples of this objective for the M&A.
Flipkart made a quick entry into the apparel product market, Amazon did a business model augmentation with an online-offline combination, and PropTiger also completed their stable-state business model with the merger, becoming the only integrated online-to-offline real estate company in India.
Other examples are Facebook’s acquisition of Whatsapp, Axis Bank acquiring Freecharge, Microsoft acquiring Skype.
New geographies – To enter new countries, Zomato acquired (and later on shut down some of them) food tech companies in Europe and the USA. Long back, Airtel had acquired the businesses of Hexacom in Rajasthan and earlier those of Jasmin-Telia in Karnataka and AP to enter into these geographies. Of course, sometimes there is a nuance of regulation forcing companies to do such types of acquisitions (like in Airtel’s case, licences were given state-wise and these M&As were more to get those licences).
Acquiring scale : Some M&As are done not to enter into a new product or new customer segment or new geography. But these are done to quickly acquire scale in their mainstream business, and thus acquire leadership position and deter newer players from entering or become a favoured destination of funding. With the Consumer Internet paradigm of one or two players finally surviving in each sub-sector, VC funds also take up bets quickly in each market and each sub-sector on which 2-3 players to double up their funding on. If you are a late entrant into a sector, you need to quickly acquire some businesses and build scale to become one of these favoured companies. Ola’s acquisition of Taxi-for-sure, or Quikr Homes’ acquisition of CommonFloor are examples of this type of imperative.
Examples from “old-economy” sectors are Vodafone-Idea merger to fight challenges thrown by Jio (and Airtel), HDFC Bank’s acquisition of Times Bank, Centurion Bank, and Birla Cement business growing through acquiring multiple smaller cement companies.
Let’s look a bit at the post-merger situation in the two types of imperatives above. In most of the cases where the Business Model gets completed, the mergers hardly produce too many ripples since most of the components are symbiotic and non-overlapping. Some top management layers may leave in some time as they become Vertical Heads in a bigger company from the business heads earlier. Some overlaps may happen in some central functions like Human Resources, Finance, Marketing. However, in cases where the M&A has happened to acquire scale, especially in the same geographical regions, then there are instances when there is overlap in the Line functions also like sales and local marketing. These are the times when there could be some higher redundancies, especially in team manager and area head levels in sales teams. Redundancies in staff functions also will be higher since these M&As are not to acquire a skill-set or capability, bit more for scale which is more relevant at frontline levels.
The Indian economy is poised at an interesting juncture. If we are able to grow at 8-10% for the next 20 years, there will be too many businesses having to move faster, funded by foreign funds. And too many cases of having to acquire or merge with another company to move faster than the economy and grab a place under the sun. As long as we remember the main objective behind the M&A, and execute with that in mind, there are chances we will have a successful M&A.