New Delhi (India) August 5 : The Indian mid-market sector, comprising Micro, Small, and Medium Enterprises (MSMEs) and Small and Medium-sized Businesses (SMBs), plays a crucial role in the nation’s economic growth. These businesses are increasingly looking towards mergers and acquisitions (M&A) as a strategic tool for scaling operations, diversifying offerings, and unlocking value. As we step into 2024, several factors make the Indian market particularly attractive for M&A, setting the stage for a potential surge in dealmaking.
Market Attractiveness and Favorable Macroeconomic Factors
Three main factors underpin our optimism for a new phase of dealmaking in 2024. First, recent improvements in financial markets, driven by slowing inflation and expected interest rate cuts, are enhancing business confidence. These economic conditions make financing more accessible, encouraging companies to pursue strategic acquisitions. Second, there is significant pent-up demand for and supply of deals. Many businesses that delayed transactions during the uncertain economic climate of the past few years are now poised to move forward. Third, the strategic necessity for many companies to adapt and transform their business models is at the core of dealmaking. As the market evolves, businesses must innovate and expand to stay competitive.
India’s demographic dividend, with a large, youthful population, provides a substantial consumer base for various products and services. The Confederation of Indian Industry (CII) projects India’s middle-class population to reach 583 million by 2025, driving demand across multiple sectors. Moreover, the government’s initiatives, such as “Digital India” and the liberalization of foreign direct investment (FDI) norms, have created a conducive environment for business operations and investments.
In 2023, the Indian M&A landscape saw transactions worth over $80 billion, with significant activity in technology, consumer goods, pharmaceuticals, and manufacturing. Examples include the acquisition of Sula Vineyards by Grover Zampa Vineyards and the merger between Aarti Industries and Sandhya Organic Chemicals, highlighting the consolidation trend in various industries.
M&A as a Growth Strategy for Mid-Market Companies
For mid-market companies, M&A offers a pathway to scale and enhance competitiveness. Acquiring other businesses provides immediate access to new markets, technology, and talent. A notable example is the acquisition of Coimbatore-based water purifier manufacturer Aquasub by Delhi-based Kent RO, which allowed Kent to diversify its product portfolio and expand its manufacturing capabilities, thus strengthening its market position.
M&A also enables diversification, reducing dependence on a single revenue stream and opening new revenue opportunities. The acquisition of Mithila Makhana, a traditional Indian snack company, by Prataap Snacks is a prime example. This acquisition allowed Prataap Snacks to enter the niche but growing ethnic snacks market, thereby diversifying its product offerings.
Furthermore, M&A can result in cost synergies and operational efficiencies. By integrating operations, companies can achieve economies of scale, reduce redundancies, and optimize supply chains. The merger between Lupin and Gavis Pharmaceuticals allowed Lupin to expand its product portfolio and enhance its presence in the US generics market, showcasing the potential for operational synergies in cross-border M&A.
Unlocking Value and Preventing Profit Erosion through Exit Strategies
While M&A is a powerful growth strategy, it also provides a viable exit option for business owners looking to unlock value or prevent profit erosion. As markets evolve and competition intensifies, some mid-market companies may face challenges in sustaining growth or profitability. In such scenarios, selling the business can be a lucrative exit strategy and safeguard against future uncertainties.
For instance, the sale of Nalli Silks’ wholesale business to Reliance Retail allowed Nalli to focus on its core retail operations while unlocking significant value. Similarly, the acquisition of a majority stake in Bikaji Foods by LightHouse Funds provided the original promoters with a partial exit and ensured continued business growth under new strategic leadership.
The Importance of a Strong Foundation and Culture
In the competitive middle market, Indian firms that demonstrate strength and resilience are better positioned to secure successful M&A deals. Building a solid foundation and a strong organizational culture is crucial, as these factors enhance a company’s attractiveness to potential acquirers. Businesses that invest in robust governance, skilled management, and sustainable practices are more likely to succeed in M&A transactions and achieve long-term growth.
Conclusion
M&A offers mid-market companies in India a robust platform for growth, diversification, and value unlocking. With favorable economic conditions, increasing digitalization, and supportive government policies, the stage is set for a new wave of dealmaking in 2024. Whether aiming to enter new markets, diversify offerings, or seek a profitable exit, M&A remains a crucial strategy for MSMEs and SMBs looking to thrive in the dynamic Indian market. Companies that build a strong foundation and adapt to changing market conditions will be well-positioned to lead in their respective industries.
ABOUT THE AUTHOR
Jubin Mishra is a Partner at Blue Helion, bringing a wealth of experience as a Business Advisor and Strategy Consultant. As a partner at Blue Helion, Jubin acts as an advisor, mentor, and member of the CXO and Founder’s core teams and also helps define and operationalise the transformation agenda. Jubin Mishra is the author of Unmasking Startup Reality of Successful Employees: Why Some Entrepreneurial Dreams Remain Unfulfilled?
Syndicated press content is not written by ED Times
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