There is heightened M&A activity in the digital space. While startups are buying legacy businesses, big companies are acquiring digital startups. Nisha Poddar of Moneycontrol caught up with Sanjeev Bikhchandani, Founder & Executive Vice Chairman, Info Edge, on the deal trends and valuations in the startup world. Info Edge holds 18 percent in IPO-bound Zomato, which is aiming for an $8.7 billion valuation at listing.
Q: How do you gauge the M&A action in the digital space, in which online companies are buying offline, and legacy businesses and big companies in the offline space are acquiring digital startups?
A: I think it's important to look at the motivations of various players involved in these transactions. In the last 12 months, there have been a number of transactions of a certain kind worth commenting about -- whether it is acquisitions or investments by Reliance Jio or whether it’s Tatas getting active.
You see, more and more offline players are realising that digital adds value. These valuations are worthwhile, and the market is changing. This is also because people have seen a transition to digital in the larger ecosystem, and they figure that, maybe, digital is a big, bigger part of the future than they had thought earlier.
So you got online companies investing in or acquiring offline players. Then you have probably an online, digital player with a humongous valuation, truckloads of cash, access to more and more capital, and investors lining up investments. But they actually also want to consolidate to get into a hybrid model, perhaps have a quicker path to get some more revenue, and, are therefore, acquiring offline players. Then you have offline players getting into digital, like Tatas buying Big Basket.
Q: Would you agree that a large part of the deals is driven by the influx of liquidity into the tech space?
A: Funds have a finite life. And so, it’s the obligation and responsibility of the entrepreneurs to provide them that exit, whether through a strategic sale or listing or a buyback or a sale to another income investor. I guess all options are on the table. People go for the best one. Naturally, most entrepreneurs prefer an IPO but an IPO may or may not be possible, depending on the state of the company.
Also, I think some of the forces that drive these transactions are investor-led, and some of it for their own profits. A lot of it obviously is fuelled by the availability of capital, and actually some of the $4 trillion that was printed and infused into the system by the Fed, post COVID, came to India. Now, there's more liquidity than people know what to do with. This is why you're seeing valuations go up in private markets, in public markets, everywhere.
The truth is if some of this $4 trillion had not come in, perhaps the valuations would have been more tempered and we may have seen fewer unicorns. Look at Info Edge. Our shares were probably half this price, maybe, last year. Has the company fundamentally changed much? Not so much.
Q: It is also a power shift in some ways as new unicorns buy out legacy businesses. How do you view this power shift between legacy companies and the startup unicorns? A: I would say that I’ve seen old-economy companies and manufacturing companies, which are now making aggressive acquisitions. I think that’s a new thing because, earlier, Indian companies were not giving great valuations to digital companies, and that’s why they didn't get in.
Now, I think with the digital transformation, people are seeing value, and are paying higher price and getting into it. I see more and more of this happening. Now, should there be a market correction? Should liquidity-driven valuations come down? I think the trend of old-economy companies or manufacturing companies or brick-and-mortar companies acquiring digital businesses and transforming their business to deliver will continue, whether at this price or on a higher price or a lower price.
Q: What’s your view on the frequent fund-raising and the valuation game in the startup space, especially ahead of IPOs?
A: There is one fundamental aspect you must not ignore. It is that the world is going more and more digital, post COVID-19. Whether it is e-commerce or remote content or sales, whether it is an interview over Zoom, rather than in your studio, we are going more digital. That has made this structural shift, that has made digital platforms and companies more valuable, fundamentally.
Having said that, there's an element of competition for investors also.
Q: The jury is still out on the success of these M&A trends. What do you have to say about the factors that can spoil the party, considering that the public and private markets are different?
A: The valuations of public markets go up when you go down or you are feeding off your price on earnings multiples. When a listed company buys an unlisted one, you know, the markets give you some time -- maybe a year or two -- and then it begins to scrutinise what value that acquisition has created to your top line, to your bottom line, to your growth and to any other strategic advantage that the acquisition has given.
So the microscope under which you work through public market is very, very different, as opposed to a private market. See, investment bankers do the deal, but then their life ends with the deal. One company acquires another, and their life begins with the deal because even work is required to acquire and then actually execute and make it work for your shareholders.
Execution is hard, and many, many acquisitions have failed to create value in the long run. So the jury’s out on post-acquisition execution. I think it’s pretty clear that acquisitions have happened, they are happening and they will continue to happen.
Q: Info Edge is a direct beneficiary of a big bang Zomato IPO, with an 18 percent stake in the unicorn. How do you see the demand for the first unicorn listing? A: I cannot comment on the Zomato IPO. Let the process play out.
ALSO READ: Exclusive | Zomato Eyes $8.7 billion valuation at listing, IPO launch likely in mid-July
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