Introduction
India is known for its big fat wedding seasons. Post-pandemic, people are re-engaging in weddings and ceremonies, many delayed due to the COVID-19 crisis. However, this time even the Indian corporate world is excited and organising big fat weddings a.k.a mergers. HDFC Limited has decided to merge with HDFC Bank, combining their strengths after two decades in operations. INOX has decided to merge with PVR to become the majority in the leisure segment. Tata Group is creating synergy between all its Airlines – Air India, Air Express, Vistara and AirAsia, to become a solid network of airlines. Zee Network announced a merger with Sony Pictures, to become the biggest media house in India. L&T Infotech is merging with Mindtree, to become the fifth-largest IT company in India. Meanwhile, IDFC is reverse merging with IDFC First Bank. There are much more banking, startups and large conglomerates looking to, or in process of mergers or acquisitions. There’s a new merger announcement every week and the excitement is at an all-time high. But why are so many companies looking to merge?
Why are companies opting to merge?
While each company has its reasons to enter into a merger, certain common factors have made mergers and acquisitions attractive. Firstly, after the pandemic, the businesses and the balance sheets of most companies took a big hit. This has resulted in operating inefficiencies in the companies and a lack of strength in the competitiveness. While individually companies stand vulnerable, two companies with similar ideologies and beliefs together can be a brutal force in the market. Together, companies are trying to create a synergy to grow and compete with larger conglomerates at the international level. India’s economy is a rising force in the world market, especially after the Russia-Ukraine conflict. There are wide opportunities to grow and segments to capture. The synergy of a merged entity is helping the corporates to grab the same.
Meanwhile, there are various sectors where companies have found monopolistic opportunities and they are going forward to seize the opportunity. While the competition commission is behind these mergers and closely considering their details, it’s unlikely the same would cause major troubles. Besides, post-pandemic a huge influx of credit from the Government as well as the foreign institutional investors, has increased the liquidity in the Indian market. That’s also a reason why more unicorns have emerged in India in the past two years, than ever before. With cheap borrowing rates and liquidity in hand, mergers and acquisitions have taken the driving seat, making India a hot place for M&A deals. However, with rising inflation, this liquidity is going to be reduced and the Reserve Bank of India (RBI) has already struck the first blow – a 0.4% increase in policy rates, driving away INR 83,000 crore credit from the market.
The Consolidation Curve
A study of mergers reveals that the industry goes through four phases – Introduction, Growth, Maturity and Decline. Together this cycle is known as the ‘Industry Life Cycle’. At the introduction stage, a product, segment, company or industry enters a new or existing market. The companies try to establish themselves and their place in the market. Once established, the companies enter the growth stage where it expands its business through customer segments, new products, and business verticals. Later, the companies start expanding through horizontal and vertical expansion. These are organic ways of growth. However, when the companies run out of organic growth, they opt for mergers or consolidations to cut costs, achieve efficient operations or discontinue products not performing. This phase is known as the maturity phase where the company opts for inorganic ways of growth and consolidates its businesses. Post-consolidation phase begins the decline phase where the company has to phase out its business and venture into new avenues or new technology.
The Indian Economy
The Indian economy is currently going through the consolidation phase. Over the years, India has developed its industries in various sectors and these industries are now at the maturity stage. Those developed earlier such as automobiles and the power sector are now facing a decline stage, as you can observe most automobiles and power sector companies are moving towards electric vehicles, electric batteries and clean energy sources. Therefore, it’s likely to see mergers happening where the companies try to consolidate their efforts, remove the inefficiencies and build a stronger presence in the country. It’s about time the Indian economy makes a name on the global economic map.
