Reshaping Startup India with M&A

The startup ecosystem in India is blooming and we all know it. What we are not fully aware is the number that actually flourishes and the number that sinks without a trace. Entrepreneurship is a tough job. Some make it big, while some run out of spirit. When a startup isn’t working out the way it was planned to do, there are two options with the entrepreneur- shut-down or look for buyers. Looking for buyers will make a startup go through the process of mergers and acquisitions (M&A) essentially that refers to its consolidation through various types of financial transactions. M&A comprises a number of different dealings such as mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions. In all cases, two companies, the startup (seller) and the buying company (acquirer) are involved. While the merger is the combination of two companies into a single entity, the acquisition is startup being taken over by the buyer.

Why Consider M&A

The M&A activity in startups in India has seen a sharp rise in the past few years. While some M&A were massive and public, many were small and of mid-tier startups having a little market share. While the first and foremost reason remains the financial and operation cost being not met by the startups, there are many other reasons and benefits for both the parties.

Buy out is certainly better than being shut down. The small startups see getting acquired by other startups or significant players as the better option when they find it hard to find the required funds. The financial issue is a big determiner for a startup to look for M&A and save its day.

Cutting out competition is another main reason. Many a time’s two mid-scale competitors merge to avoid eating into each other’s profits and acquire a larger share of market. Coming from the same platform means that they take care of each other’s customers in a better manner and expand.

A better job opportunity by the acquirer is another good reason. If a startup thinks it is unable to handle its human resource and also wants a better growth, they will certainly look to be acquired by a bigger player for a better opportunity.

For the acquirer taking over a startup can provide a good platform for diversification. If a big company thinks about diversifying or providing support to its current operations, it can acquire a specialized startup of small scale.

The acquiring company gets a ready team for its work. A small startup generally has like-minded and ambitious individuals who have been working as a team for a good time, getting them on-board all together saves out their training and human resource management time.

Acquiring a company will mean getting new technology, new products, and new customers together with a dedicated team managing them all which sure sounds like a good deal for the acquirer.

Publicity always accompanies M&A which generally serves good for both the parties. It generates interest in both the companies and their products or services.

Taking the Call

M&A should be viewed as just a step forward for the startup and not the end of it. Going by the current trend it sure seems that startups are sharing this view. If a startup and buyer are thinking about M&A there must be a strong business reason behind it. The process involves a lot of rounds of talks and some more talks. The best way is to first communicate within the company and let only representatives sit down and talk together so that everyone is on the same page. With future at stake, anxiety is common which should be handled deftly by the entrepreneur. Apart from the legal matters, the entrepreneur also needs to keep in my mind the best of both party’s interests. A clear guideline should be set up as to who will be the next leader. Also, an exit policy should be drafted that suits both the parties and benefits all. All matters including financial, infrastructural, human resource management, rules and regulations, current products and services, data security and privacy, and customers should be taken care of.

The legal process of M&A, in India is a bit challenging. Though efforts are being made to ease and regularize the process. As per the current law, investors can exit either through an Initial Public Offer (IPO) or a number of private sales to new investors, but considering the complex IPO regime, it is more of a challenge than being an easy way out.

The Insolvency and Bankruptcy Code (IBC) has been introduced and is being utilized to make the system quick and streamlined. A number of cases have been referred under the IBC to decide on revival or liquidation of companies. It lets potential buyers take a look at startups on the brink of shutting down and decide if they would like to buy them out. The code aims at protecting the interests of small investors and making the process of doing business less cumbersome.

M&A is a part of a dynamic economy. With so much happening in the startup eco-system in India, the M&A trend is here to stay. Startups will always look for methods to fund themselves and grow. Getting competitors on board or having bigger players backing them can be a big boost. Deciding on the future of one’s startup can be a daunting task financially as well as emotionally. Being stagnant does no good. Similarly, for acquirers, getting startups and molding them to fit their current setup can be an upheaval task. But if the price, product, and services are worth it, investment shouldn’t be ruled out. Being realistic about a business’ values and its future helps every company decide on the best way forward.