Small and Medium Enterprises (SMEs) are credited for putting India on the firm path of economic recovery in 2022 after a tough 2021. It also plays an important role in buffering it from global economic shocks and adversities and is expected to be the driving force for Indian economy in the years ahead.
According to the latest ASSOCHAM-CRISIL joint study, this segment is expected to achieve mid-teen growth in fiscal 2022 with the pick-up of economic activities.
“A raft of measures by the government under its Aatmanirbhar Bharat banner has provided a reprieve to this segment in recent months. These include Rs 20,000 crore subordinate debt for stressed MSMEs, Rs 50,000 crore equity infusion through MSME Fund of Funds (SRI Fund), 3- lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) for businesses, including MSMEs (which was subsequently increased to Rs 5-lakh crore in Union Budget 2022-23), change in definition of what constitutes an MSME, and no global tenders for government procurement upto Rs 200 crore,” elaborating further, Bhushan Parekh, Director, CRISIL SME Solution has been quoted as saying.
The focus on the SME sector is more now as India aspires to be a USD 5-trillion economy. The sector is projected to contribute 40 per cent or USD 2-trillion to the country’s gross domestic product (GDP) by 2025 while creating 50 million additional jobs. Nonetheless, a herculean task as it needs growth of at least 10 per cent to reach that target.
DEALS AT ALL-TIME HIGH
After an incredible 2021, which saw almost USD 42 Bn raised, larger startups are now looking for mergers and acquisitions (M&A) amid a change in the scenario in recent months including venture funding tightening purse strings and valuations reset.
The route to diversify into newer spaces and add capacity saw 165 M&A deals taking place in the first half of 2022, which exceeded the average of the last three years during the corresponding period by more than twice, a report published in Inc42 said.
The e-commerce sector accounted for 38, or 23 per cent of these deals, followed closely by Enterprise-tech with 37 deals. Deal-making in the first quarter of 2022 alone was 70 per cent of the total number of M&As in all of 2021 with fast-growing sectors, including consumer services, e-commerce, edtech, fintech, and healthtech, contributing to 139 handshakes.
While six M&A deals were worth more than USD 100 Mn, Zomato’s purchase of Blinkit for USD 570 Mn grabbed headlines. Shiprocket picking competitor Pickkr for USD 200 Mn and Reliance’s acquisition of robotics startup Addverb Technologies for USD 132 Mn completed the top three deals in 2022 so far.
Data from industry tracker Tracxn, however, puts the number of acquisitions in the first quarter of 2022 at 123, including target companies that were founded after 2010, compared to 70 deals during the corresponding period in 2021.
There were USD 82.3 billion M&A deals (pending and completed) in the second quarter of this year with technology, media, telecom, and financial services being the most active sectors. This is the highest on record – more than twice the USD 38.1 billion in the third quarter of 2019 and almost twice the USD 48.9 billion in 2021, the Mint reported.
HEADED TOWARDS CONSOLIDATION
A funding boom is often followed by a market correction and a hunt for M&A targets by bigger players amid a liquidity crunch, dealmakers involved in the process said, adding that consolidation helps startups shore up resources to fight bigger and well-capitalised rivals.
Dozens of unicorns, privately-held startup companies with a value of over USD 1 billion, and soonicorns (potential to join the unicorn club) have either acquired companies or are in the process of buying out firms as M&A activities fuels expansion of offices and operations, increased R & D, innovation in products and services, better access to expertise, increase skilled employment, and overall growth.
M&A is viewed as just a step forward for the startup and not the end of it. In the absence of required funds, small startups see getting acquired by significant players as the better option as it allows them access to new technology, new products, and new customers, while cutting out competition is another big determiner for M&A.
“Beauty and personal care firm The Good Glamm Group, fintech startups Cred and Razorpay, edtech player Scaler, and online used car selling platform Spinny, among others, have been acquisitive, while others such as ride-hailing firm Ola, business-to-business commerce startup OfBusiness, and fantasy gaming platform Dream11 are in the process of acquiring companies,” the Economic Times reported.
In the last six months, e-commerce roll-up unicorn GlobalBees has emerged as the biggest acquirer in India with nine startups, including healthy-snack food brand The Butternut Company, sustainable clothing company Mush and sports fitness equipment brand Strauss, in its kitty. A close second is cloud kitchen startup Curefoods with six deals so far in 2022. After raising USD 50 Mn last month, the startup acquired milkshake brand Frozen Bottle and merged with Swiggy-backed cloud kitchen player Maverix.
Mensa Brands made one of the biggest acquisitions of the year so far by cracking a deal with MensXP, a content commerce platform, and iDiva of Times Internet. Wearable devices startup Pebble, gardening startup Trustbasket, aromatherapy and personal care D2C startup Florona and leather goods manufacturer and seller Estalon are among its other M&A deals, an INC42 report said. In the past, the technology industry has witnessed the entry of global giants and access to global funds, courtesy of M&A.
ENGINES OF ECONOMIC GROWTH
According to global financial data firm Rifinitiv, M&A activities in India grew by 29.6 per cent in volume terms during the first quarter (Jan-Mar) of 2022, thus becoming the highest ever quarterly number since 2018 when it was USD 31.1 billion. Bucking the global trend, M&A deal- making in India hit a four-year high in value term at USD 30.3 billion during this period.
With a gain in market share, capital flow, and access to technology, geography, talent and global operational means, M&A, strategically, provides a competitive edge to SMEs, with every stakeholder benefitting from the rippling effect in the ecosystem.
With bigger businesses stepping in, the startups also benefit from the availability of enhanced protection for intellectual property, trademarks, and design and greater access to quality human capital. Besides expansion and growth, M&A helps in expanding the customer base and brings along speed-to-market benefits.