How to leverage M&As to expand available capital and opportunities

M&A activity in India is a lot more to do with just the growth of an individual company.

By Manmohan Tiwana 

India could become the world’s third-largest economy in the next five years and a developed nation by 2047, according to the World Economic Forum. These bold milestones are representation of the country's thriving markets and their ability to redefine the global business landscape.

However, at the same time, the country struggles with capital shortage, which is now largely magnified by significant foreign direct investment reduction. Moreover, India's domestic consumption growth rate, which is a large driver of the nation's GDP growth, has also reduced greatly.

Nevertheless, the country remains well-placed to withstand economic uncertainty supported by its large and young working-age population, advanced technological capability, business-friendly government and favourable geopolitical positioning in the China+1 strategy.

It is at this juncture that the stage is set for India to bring in the capital it requires to meet its economic aspirations.

Mergers & acquisitions (M&As), with their capacity to attract domestic and foreign capital investors, create new markets, improve products and services and generate jobs, may be the fastest way for the country to do so.

The Power of M&As

Speedy and sustainable innovation is the growth differentiator in today's competitive business environment. Though organically, businesses can achieve this with greenfield expansion, M&A offer a quicker though inorganic route to growth.

This is because M&As give businesses an immediate way to enhance their portfolio of products, attain entry into newer markets, and enhance economies of scale – factors that also makes a firm more alluring for investment. Moreover, research by EY reveals that even during times of economic uncertainty, “M&As remain one of the most potent means of improving total shareholder return (TSR) and enterprise value (EV)”.

M&As Shaping the Indian Economy

M&A activity in India is a lot more to do with just the growth of an individual company. It is also part of driving a fast-moving business environment with a far greater economic impact.

Successful deals bring in much-needed capital, foster innovation, creating synergies that can lift whole industries in the country. For instance, Tata Steel acquired Bhushan Steel in 2018, thereby increasing production capacity and hence market share in the long run, ultimately consolidating the Indian steel industry for better global competitiveness.

Moreover, India, due to initiatives such as 'Make in India', has improved by leaps and bounds as the most developing hub for manufacturing globally and a hot destination for investment. Despite a slowdown post-2022, M&A activity in the country has remained strong in 2023, with high volumes recorded in renewable energy, infrastructure, logistics and healthcare, among other sectors, according to a recent Bain & Company report.

M&As also have the power to attract global investors to be part of India’s growth story. Cross-border deals like the $16 billion acquisition of a 77 percent controlling stake in Flipkart by Walmart helped firm up India's ecosystem in e-commerce.

These types of deals also allow firms to reach new technologies and markets. However, they also involve problems like regulatory hurdles and geopolitical tensions. Hence, while many benefits come with M&As, so do the challenges. However, the country's deals market shows promise on account of strong confidence seen across businesses and investors amid a global economic slowdown.

Challenges and Considerations

M&As in theory look like the best way to fast track business growth. However, in reality, they are based on careful planning, execution, and integration. Companies have to find their way through difficult regulatory environments, cultural differences, and market dynamics. After all, every M&A does not bring in the expected synergies, and some of them can cause loss of jobs, among other demerits.

Hence, the full value from M&As should be realised by disciplined due diligence on cost and synergy with a detailed integration strategy, advises EY.

Moreover, businesses can further improve their M&A approach by dealing with specific issues regarding the regulatory environment, cultural context, valuation difficulties, and legal risks. Businesses can also minimise these challenges by calling in for advice and guidance by M&A experts.

M&As: Unlocking India’s growth potential

The pace at which India is scaling the ladder to emerge as one of the biggest economies in the world, it is in dire need of M&As that bring in much-needed domestic and international capital.

Such deals will help India fast-track its economic transformation, invite investment from all over the world, and fulfil its ambitious targets. This will also pave the way for India to serve its role to the maximum as the world’s most-promising economic powerhouse.

(Manmohan Tiwana is Managing Director & CEO at Wodehouse Capital.)

Views are personal and do not represent the stand of this organisation.