Cos bank on M&As to deliver shareholder returns

In a post-pandemic world, Indian companies are leveraging merger and acquisition (M&A) deals to transform their businesses and power their growth. Interestingly, conglomerates which have been able to reshape their portfolios using M&A and divestitures have also delivered robust total shareholders returns. “Today’s CEOs face dual pressures of growth and disruptions—and both at historic levels. Shareholders are expecting companies to deliver 27% annual earnings growth over the next three years, which is an unprecedented seven times increase over the past three years,” according to analysts at Bain & Company.

M&A is now more about adding to the scope and capabilities of a business, rather than merely acquiring competing firms to increase market share. In fact, scope and capability deals currently account for four out of ten M&A transactions. Such deals made up about 46% of all strategic transactions above $75 million closed in 2021, according to a report published by the global consultancy.

The volume of 2021 M&A deals in the country is near an all-time high. Surprisingly, the momentum is being led by first-time buyers, accounting for over 80% of M&A deals closed in 2020 and 2021. Their share stood at less than 70% through 2017 to 2019. Helped by abundant cash reserves, buoyant foreign direct investment inflows and adequate availability of private equity (PE) dry powder, inking sizeable M&A deals have been relatively easy for companies.

The nature of the deals are also more broad-based now, with more transactions being closed in the $500 million-$1 billion bracket, a marked departure from the past when the deal activity used to be largely driven by big transactions amounting to over $5 billion.

Many Indian companies are overhauling their portfolios through M&As, “betting on profit pools of the future such as digital, renewables, electric vehicles, consumer and fintech.” A case in point is Reliance, which has been aggressively growing emerging businesses through M&A with a spate of acquisitions in retail, digital and renewables. For that matter, the Tata Group is also actively rejigging its portfolio and has done over 20 deals in the last two years including multiple acquisitions to build its super app.

New-age companies have equally hogged the M&A spotlight. Edtech major Byju’s is leading the pack, having already spent over $2 billion in acquisitions this year, the biggest being the near $1 billion acquisition of brick-and-mortar test prep service provider Aakash Educational Services. E-health firm PharmEasy made multiple acquisitions including a 66% stake in Thyrocare. “Startups and digital insurgents are driving disruption across sectors…..insurgents have been out shopping full force whether it is to enter new geographies like in the case of Oyo, build omni-channel capabilities and enter new verticals like Byju’s,” said analysts. It is pertinent to note that almost two-thirds of deals done by digital firms have been stock plus cash transactions.

Analysts at Bain & Company expect the trend of deploying M&As to drive business transformation to continue well into 2022. “There is plenty of historic evidence that shows that companies that sharpen their portfolios through acquisitions/divestitures during turbulence do better than the market. During the 2008 financial crisis, Indian companies that acquired or divested outperformed their peers 2:1 in EBIT (earnings before interest and taxes) growth over the next five years,” said Karan Singh, managing partner, Bain & Company India.