Downturns & M&A's

Salonie:

Avnish, downturns typically result in consolidation as we all know and in addition to this there are also unfortunately some companies that do shut down. But subsequently they also say that M&As don’t work but there are some in our portfolio like OLA which have successfully pursued an M&A.

Avnish:

Downturns are a bad time to talk about it because they get associated- M&A they get associated with bad things. The reality is the worldwide M&A volume is, i think the last i read was probably at an all time high.

See the bad M&A is not the topic of this, that’s acqui-hire, that’s a distress sale, and beyond a point there is not much i can add to that. if the product of service is not working and you have to end up there, which people in this situation had to. it is tragic but that’s where it is. i think the more interesting discussion to have is, does M&A create value?

And the single line of this is most M&As fail. But if M&A is done thoughtfully it can create tremendous value. eBay bought PayPal for a billion dollars, the market cap of PayPal, i haven’t checked it recently but its 200 trillion dollars, its like crazy.

So things can work and i think that probably created more value for eBay shareholders. Ola bought TFS created huge value. So i think the best way to think about it is, first you have a concept of what is M&A, there are 4 types typically.

So there is vertical M&A, where you are doing vertical integration, there is concentric product extension, so you have a customer set but you are trying to surround them with other products. There is horizontal merger, which is OLA with TFS, where you are getting economies of scale and reducing competition. And then there is i would say some form of a market entry conglomerate type of work. So if you look at Flipkart, Walmart, obviously that’s one’s of the biggest in the indian VC industry. That’s a conglomerate / market entry. Now the question is, is Walmart in that business in the US, yes.

Are they the leader in that business, no. But are they leader in india, supposedly right?.

So i think those are the four types of mergers and i think one should look at it, if it falls in one of these categories. it is something to think very hard about because it can create very serious value and conversely if you are left on the side, while this stuff is happening, your business might fall behind. if you are not part of this shaping of this industry. i tell some of the founders, when industries are changing in structure, either you shape that structure, or you can get shaped by that structure. You want to be in the former bucket and for that M&A is very important.

Salonie:

Understood.