Small and tiny is beautiful only for babies! In business, the bigger the merrier. In a globalized world scale matters a lot and no wonder mergers and acquisitions gathered momentum in 2018 even as global economy wasn’t getting into good shape.
One of the biggest deals happened in India with Walmart acquiring a 77% stake in Flipkart for about $16 bn in May 2018. As the year draws to a close, after hearing about the merger of Pfizer Inc (NYSE: PFE) and GlaxoSmithKline Plc any more major announcements are unlikely. The consumer healthcare business of Pfizer is being merged with GlaxoSmithKline’s existing consumer health care business. The sales for 2017 of the combined entity was reported at $12.7 bn.
Forbes has reported that M&A activity in 2018 was the second highest on record at $2.72 trillion across 13,575 deals compared to the previous high of $2.94 trillion recorded in 2007 just before the onset of the financial crisis. India also witnessed hectic activity in M&As with an annual growth of 98% at $92.2 bn.An update from PwC shows deals have crossed US$100 bn.
What could be the reasons for increase in mergers and acquisitions?
One, the globalized nature of the market makes it imperative for companies to expand their reach and hence it is imperative to extend its financial muscle. Second, improved liquidity in the market is making companies to aggressively deploy capital, according to a report in Forbes. Third, it is sometimes a question of survival as in the case of Vodafone and Idea to counter the fierce competition forced by Reliance Jio and Airtel.
Fourth, it could be to establish its presence in a new product or market. Tata Steel’s acquistion of bankrupt Bhushan Steel in auction for $4.9 bn was to make inroads into automotive steel industry.Fifth, technological disruptions can have a great impact on businesses especially in healthcare and technology sectors.
The supportive factor for rise in M&As in India was the implementation of Insolvency and Bankruptcy Code.Going ahead, elections and uncertainties over policy making may lead to a temporary slowdown in M&A activity before regaining momentum again. The positive triggers are GST implementation, RERA for real estate industry and therefore overseas investments are likely to increase in 2019.
Should it be worrying for SMEs?
As the transnational giants vie with one another to grow bigger in size is it worrying for SME’s who are struggling to grow and not to speak of start-ups just gaining hold in the industry. It is a fact that in many industries, small clusters of vendors and suppliers are formed that cater to the big players. For eg. the auto ancillary industries.
Startups do get tax exemption in India for three years, benefits for IPR and relaxation in public procurement norms, faster exit but more importantly a novel approach called Corporate Connect may help them grow, according to Chandrajit Banerjee of CII. In this approach, the big corporates support the start-ups who develop products and services for them. They become an integral part of the supply chain and corporates may invest substantially in them and make them financially strong.
The regulations have to be tightened when M&A activities increase as it could thwart competition and create monopolies.That explains why the number of litigation related to mergers are rising in recent years.