Photo: iStockphoto
Photo: iStockphoto

Consolidation in new-age businesses: What’s in store for stakeholders?

Regulators will need to ensure a level playing field and fair trade practices where consolidation may, in fact, result in an oligopoly with only two or three large players left standing

New-age industries have been gathering steam, and not just in sectors such as e-commerce. Terms like robotics, artificial intelligence (AI) and the Internet of Things (IoT) have entered the common lexicon, while entrepreneurship and innovation are becoming increasingly “mainstream" in their emergence and social acceptance.

New-age segments are emerging across various industry classifications, including drones, electric vehicles and robotics in manufacturing, and analytics, robotics process automation and targeted service delivery using AI in the services segment. It is observable that deal activity in these segments includes not only fundraising by start-ups, but also consolidation in various economies. And, India is no exception.

Apart from established players dipping their fingers into areas such as data analytics and AI, start-ups are seen as the wellspring of technological innovation and disruptive services. While start-up deals typically consist of fundraising, waves of consolidation have also been seen in such companies, interestingly in segments which have changed the face of their respective markets.

Examples include segments like social media, which saw the Facebook-WhatsApp mega deal in 2014, and ride-hailing, wherein giants such as Uber, Grab, Lyft and Didi Chuxing are now consolidating —either with each other or with acquisitions in the fast upcoming bike rental segment.

In India too, e-commerce giant Flipkart made multiple acquisitions, including Jabong, Myntra, eBay India and PhonePe. There was also a merger proposed by SoftBank between Flipkart and Snapdeal in 2017, which did not materialize. In the food ordering segment, Zomato and Swiggy have both been in acquisition mode.

There has been significant market buzz on the high valuations that some start-ups have achieved. In most cases, only limited deal-related information is available, particularly with respect to the implied equity value of the target entity. It is typically difficult to value a start-up company, given the early stage of operations, lack of operating history, fuzziness in terms of future potential for growth, timeline to turn profitable, etc. Investors are betting on the future and valuations become highly subjective, but sustaining such high valuations will ultimately depend on the actual performance and market factors which play a very significant role in these segments.

Of course, like any business decision, the economic rationale has to be evaluated every time and consolidation is only one of the options that a young company will consider. From a regulatory standpoint, there are a variety of start-up-focused schemes launched by the government, but not specifically targeted at aspects like consolidation and competition control.

At some point, however, regulators will need to ensure a level playing field and fair trade practices where consolidation may, in fact, result in an oligopoly with only two or three large players left standing.

With inputs from Madhavi P., director at PwC India.

Sanjeev Krishan is leader-deals at PwC India, and Neeraj Garg is partner at PwC India.

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