Bengaluru: Merger and acquisition (M&A) activity in India’s start-up ecosystem is increasing, but it will take two to five years more to gain scale. Start-ups that have received venture funding in the last two years will take at least that long to begin acquiring other companies or gain enough traction to become potential takeover targets themselves.
As overall funding for technology start-ups declines, M&A deal value in 2015 went up 70% over 2014 to $1.35 billion across 137 transactions, with a 130% increase in the deal volume compared to 2014, according to a report, India Technology Product M&A Industry Monitor, released by investment banking firm Signal Hill and software products think-tank iSpirt.
The report was released a day ahead of StartupBridge India, a conference that aims to open up investment and acquisition opportunities for US tech companies in India, and is being organized at Stanford University by The Indus Entrepreneurs, Silicon Valley, iSpirt, and Stanford Center for International Development.
However, 74% of M&A deal value since 2014 was contributed by eight big buyouts, many of which were driven by industry consolidation. The largest deal among these is the $900 million acquisition of ad-tech firm Media.net by Chinese firm Miteno Communication Technology, which was also among the largest ad-tech deals globally.
There were 250 M&A deals worth less than $5 million amounting to $97 million, 52 deals between $5 million and $100 million amounting to $892 million, and seven deals larger than $100 million amounting to $2.4 billion that took place from 2014 to the third quarter of 2016.
This highlights the large gap that exists in deals in the mid-stage, though that gap is expected to close in the coming years.
“With an increasing number of companies that received funding during the 2014 and 2015 funding boom achieving scale during the next couple of years, we expect Product Tech M&A levels in particular across mid-size and large transactions to pick-up multi-fold from here,” said Klaas Oskam, managing director of Signal Hill India. M&A activity is important for a start-up ecosystem as it gives investors more than paper gains, which lets them make further investments.
About $45 billion was invested in US companies by venture capital and private equity firms between July 2005 and December 2009. Assuming it takes about seven years for product to scale after it gets funded, there was $473 billion in technology M&A between January 2012 and June 2016, which suggests a 10.5 times return or capital exit ratio.
For India, the third biggest start-up ecosystem in the world, the report says the ratio of exits (or money invested against the money gained from exits) stands at two.
“As India’s start-up ecosystem starts to evolve we expect this ratio to go up considerably. However for the ratio to be healthy (>4) M&A activity will have to pick-up multi-fold to give returns to the large amounts of VC/PE capital that were raised in recent years,” said the report.
The funding deal volume (223 deals) in the first three quarters of 2016 was comparable to the same period last year when 250 deals took place, but deal value dropped 54% to $2.4 billion from $5.29 billion.
When split by deal size however, there seems to be a funding crunch for early stage companies, as deal volume in deals worth less than $5 million dropped 36% in the third quarter of 2016 compared to the same period a year ago.