The startup world has been abuzz with the recent decline in mergers and acquisitions, contrasting sharply with the booming public equity markets. According to data from Inc42, the number of M&A deals involving startups plummeted by over 42% in 2024, a significant drop from the over 70% decline observed in 2022. This downward trend has left industry experts pondering the implications for the future of the startup landscape, as the easy availability of public capital and the flourishing capital markets have reshaped the traditional M&A landscape.
Bharat Anand, a Senior Partner at Khaitan & Co., shed light on the factors contributing to this dramatic decrease in startup mergers. He noted that many potential M&A transactions in the past year and a half have veered towards the capital markets instead. Companies with revenue ranging from Rs 500-1000 crore now find it easier to go public, reducing the necessity for secondary sales or buyouts. The surge in startup Initial Public Offerings (IPOs) in 2024, with 38 companies going public compared to 21 in 2023, underscores the allure of the public markets as a lucrative exit strategy for startups.
While 2024 did witness a modest increase in startup funding compared to the previous year, it still fell short of the levels seen in earlier years. Anand cautioned that the declining trend in M&As must be analyzed alongside the capital raising patterns. He explained, “If fewer companies are being bought and sold, it could be because they are securing capital to grow. When companies are in a growth phase, owners are less inclined to sell. If capital raising is steady or increasing, it explains lower M&A activity.”
Mergers and acquisitions play a pivotal role not only as an exit strategy for investors but also as a growth strategy for companies. Private equity and venture capital-backed firms often pursue a ‘buy and build’ approach, acquiring competitors to strengthen their market position. Prominent M&A deals in 2024 included Zomato’s acquisition of Paytm Insider, OYO’s purchase of checkmyguest, Fullerton India’s investment in Lendingkart, and Freshworks’ acquisition of Device42, highlighting the diverse nature of these transactions.
Ashish Bagadia, a Partner at BDO India, emphasized the importance of a solid business case for value unlocking and synergies with buyers in securing favorable valuations in M&A deals. For businesses without a compelling case, aligning with a strategic buyer could be the best exit strategy in the current market scenario. Global uncertainties and foreign investor sell-offs have added pressure on the Indian equity markets, making public market exits less attractive. The Nifty50 index has already slipped by 2.4% year-to-date, reflecting the market’s volatility.
Looking ahead, experts like Nagadia foresee a shift in the M&A landscape, analogous to previous capital cycles. Sellers are expected to adopt a cautious approach, monitoring market trends before realigning with the new norms. With the current scenario favoring buyers, valuation expectations in M&A deals will need to be recalibrated. Despite the current lull, experts anticipate a resurgence in M&A activity in the coming months, signaling a potential upswing in the startup mergers and acquisitions arena.
In conclusion, the recent decline in startup mergers amidst a thriving equity market paints a complex picture of the evolving startup ecosystem. While the allure of public capital and IPOs has diverted some potential M&A transactions, the strategic value of mergers and acquisitions remains paramount for companies seeking growth and market consolidation. As the industry navigates through uncertain times, adapting to changing norms and recalibrating valuation expectations will be crucial for a resurgence in M&A activity.
