RIL, Tata, conglomerates that acquired start-ups tripled shareholder returns; others floundered amid pandemic

Conglomerates such as Tata group, Reliance Industries, Amazon, and others, that have acquired new-age or tech-based start-ups, have delivered 3x total shareholders returns. These large companies reshaped their portfolios using M&A and divestitures.

merger, acquisition, tech-based start-up, shareholder returns, disruption, investment, Reliance Industries, Tata Group
Large conglomerates are going the M&A way to stay ahead of the curve.

India’s large, legacy conglomerates that have worked to reshape their businesses during the pandemic by acquiring new age tech startups have not only kept afloat, but have thrived. The country’s biggest business houses, including Reliance Industries, Tata Group, and Mahindra & Mahindra, have tripled the shareholder returns in the last two years, according to a study by Bain & Company. “Conglomerates that have reshaped their portfolios using M&A and divestitures have delivered 3x total shareholder return (TSR) vs those that failed to actively manage their portfolios,” Vikram Chandrashekhar, Partner (Healthcare practice and Mergers & Acquisitions), Bain & Company India, and the author of the report, told Financial Express Online.

While the ongoing pandemic has accelerated disruption, companies across sectors are responding by transforming their businesses through mergers and acquisitions (M&A) and divestitures in order to stay relevant and afloat. This trend, in particular, has seen more inclination towards larger conglomerates acquiring new age or tech-driven companies or start-ups. “Several Indian conglomerates are taking note and overhauling their portfolios through M&A, betting on profit pools of the future such as digital, renewables, electric vehicles, consumer, and fintech,” Vikram Chandrashekhar said.

Reliance Industries has been aggressively growing emerging businesses through M&A, with recent acquisitions in retail, digital, and renewables, including Fynd, Saavn, Embibe, EdCast, REC Solar, among others. The Tata Group is actively reshaping its portfolio and has done over 20 deals in the last two years, including multiple acquisitions (BigBasket, 1mg) to build its super app. The Mahindra Group has reshaped its portfolio and exited loss-making businesses, with multiple divestments including a potential divestment of its stake in SsangYong.

Amazon too is actively looking at start-ups in India for acquisitions and investments. Earlier in March, Amazon had made its first investment in MyGlamm. Amazon also counts investments in the likes of financial services marketplace BankBazaar, home services start-up HouseJoy, among others.

Among the top acquired start-ups this year in India are BigBasket, Great Learning, PlaySimple, Simplilearn, SunSource Energy and 1mg. Start-ups today are driving disruption across sectors – from finance to retail to technology – with two-thirds of India’s unicorns being added in 2020 and 2021 alone. Armed with capital and right technology, these start-ups are the best bet for established, legacy firms.

In order to stay relevant in an era of rapid change and disruption, conglomerates are penetrating newer markets, new industries and geographics, exploring new customer segments and making changes to pricing and packaging. And the best way to do this is to acquire fast moving and disruptive start-ups, the challenges for the same are many, but if executed efficiently, can prove to be the best growth strategy for them.

The report released by Bain & Company titled “India M&A: Acquiring to Transform” said: “Over the past 18 years that we have been analysing the performance of more than 100 conglomerates in India and Southeast Asia, there has been a gradual erosion in shareholder returns in conglomerates.”

The scaling M&A trend during Covid era

According to the report, mergers and acquisitions in India have reached an all-time high across sectors, led by more first-time buyers accounting for more than 80 per cent of the deals closed in 2020 and 2021. This is an increase from less than 70 per cent through 2017 to 2019. “Post-Covid M&A has been different. We are witnessing a democratisation of the Indian M&A landscape. Unlike in the past, executives making acquisitions are seeking to transform their businesses, not just grow them… Scope and capability deals now account for 4 out of 10 transactions, often addressing disruptive themes, such as digital or renewables,” said Vikram Chandrashekhar.

The greater deal momentum is being driven by an accelerated disruption across sectors. Also, cash reserves and foreign direct investment inflows are at their highest-ever levels, availability of private equity (PE) dry powder is resilient, and interest rates are at a low. Armed with this capital, one of the ways companies are responding to disruption and growth expectations is through acquisitions. “The unprecedented flurry of deals seen in 2021 is the result of a higher pressure to grow and a need to seize more opportunities to disrupt, faced by CEOs today,” said Karan Singh, Managing Partner, Bain & Company India and co-author of the report.

Another M&A hotspot, as maintained by the report, is renewable energy, with energy players, both domestic and international, making big bets on renewables in India through M&A. This is courtesy the supportive policy commitment and falling prices in the segment. Environmental, social, and governance (ESG) will be another long-term value creation hotspot over the next decade.

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