NEW DELHI— Dec. 21, 2021— Mergers and acquisitions (M&A) in India are near an all-time high, led by more first-time buyers than ever before, accounting for more than 80% of the deals closed in 2020 and 2021—a marked increase from less than 70% through 2017 to 2019.

This is according to Bain & Company's new report, India M&A: Acquiring to Transform, released today. The nature of deals is more broad-based, including more mid-sized deals ranging from $500M- $1B, compared to the mega $5B deals that drove activity in 2017-19. This greater deal momentum has been driven by an accelerated disruption across sectors, and companies are using M&A to transform their businesses for a post-Covid world. Cash reserves and foreign direct investment inflows at their highest-ever levels, availability of private equity (PE) dry powder is resilient, and interest rates are at a low. Armed with this capital, one of the ways companies are responding to disruption and growth expectations is through acquisitions.

“The unprecedented flurry of deals seen in 2021 is the result of a higher pressure to grow and a need to seize more opportunities to disrupt, faced by CEO’s today” said Karan Singh, managing partner, Bain & Company India and author of the report. “With shareholders expecting companies to grow their annual earnings by nearly a third over the next three years, companies are being bold and looking at transformational deals where the objective is not just increasing scale but building new engines of growth and new capabilities, beyond the company’s core business.”

While M&A activity has been robust for a few years, the nature of deals in the past 18–24 months has been very different from those of earlier years. Scope and capability deals accounted for nearly half (46%) of all strategic deals above $75M closed in 2021. This is way above the 36% of such deals recorded in 2020 and 31% in 2019. This M&A rally is strong across the board, with everyone in the fray from startups to large conglomerates to MNCs.

Startups and digital insurgents are driving disruption across sectors from finance to retail to technology, evidenced by two thirds of India’s unicorns being added in 2020 and 2021 alone. Armed with capital, insurgents have been out shopping in full force, whether it is to enter new geographies like in the case of Oyo, build omni-channel capabilities and enter new verticals like BYJU’s, or build platforms as is PharmEasy doing in healthcare. Insurgents realize that their stock is valuable currency and almost twothirds of deals done by them have been stock-plus-cash transactions.

“We are seeing more first-time buyers making bold M&A moves. In many cases, these are not vanilla scale deals, but rather acquisitions to enter new verticals, new geographies, or new capabilities. Even with a sound deal thesis the value creation in such cases is not straightforward,” explains Vikram Chandrashekhar, partner Bain & Company and co-author of the report. “Getting the integration right is critical to unlock value, including making the right decisions on what should, or should not, be integrated. It’s important for insurgents and first-time buyers to proactively address topics like culture, structure, joint strategy, and tech integration. The key is to build a repeatable M&A model over time.”

Conglomerates have also ramped up M&A. Bain’s reseach indicates that conglomerates who have reshaped their portfolios using M&A and divestitures have delivered 3x total shareholder return (TSR) versus those that failed to actively manage their portfolios. Conglomerates are now actively looking to reshape their portfolio and prune ownership in legacy assets or in sub-scale positions which could be more valuable to another parent. Indian conglomerates today are betting on profit pools of the future such as digital, renewables, electric vehicles, consumer and fintech. Reliance has been aggressively growing its emerging businesses through M&A with recent acquisitions in retail, digital, and renewables sectors. Similarly the Tata Group is actively reshaping its portfolio and has done over 20 deals in the last two years, including multiple acquisitions such as BigBasket and 1mg to build its super-app.

Renewable energy is emerging as another M&A hotspot, with energy players— both domestic and international— making big bets on renewables in India through M&A. An ambitious and supportive policy commitment and falling prices have made India a hot spot for renewable investments. Players are building renewables scale and integrating across the value chain. Environmental, social, and governance (ESG) will be another long-term value creation hotspot over the next decade and there is early momentum for deals that support the ESG agenda.

Looking ahead to 2022

"2021 has shown that companies are ready to reshape their portfolios, deploying M&A as an important and relevant tool in their transformation," adds Karan Singh. "We foresee this trend continuing and another exceptional year for Indian M&A in 2022. There is plenty of historic evidence that shows that companies that sharpen their portfolios through acquisitions/divestures during turbulence do better than the market. During the 2008 financial crisis, Indian companies that acquired or divested outperformed their peers 2:1 in earnings before interest and taxes (EBIT) growth over the next five years."

Lastly, the report highlghts successful approaches for scope deals, including those designed to gain a much-needed capability and are remarkably different from scale deals:

• Specialised expertise is required early on to understand the business fit. This often means making a deeper connection to the business unit during the diligence process or expanding the set of external partners to bring in the appropriate expertise.
• Given the fierce competition for capability deals, firms must constantly track the industry landscape and its evolutionary changes and know how to focus very quickly when opportunities arise.
• Sources of value creation and risk are less predictable in capability deals than in scale deals. In capability deals it is not enough just to understand the standalone value of a target and joint value creation potential. Dimensions such as culture, sustainability and consumer sentiment should also be evaluated at the diligence stage.
• Creating value with diversified businesses requires intense attention to integration. It is more important than ever to have a clear integration thesis and playbook and a clear understanding of the critical few decisions that will make or break the success of the deal.

To receive a copy of the report or arrange an interview with its authors, please reach out to:

Aparna Malaviya, Bain & Company, India | +91 9820373038 | aparna.malaviya@bain.com

Calla Payne, Bain & Company, Hong Kong | +852 60207693 | calla.payne@bain.com