One of the largest deals to be announced so far this year was online classifieds firm Quikr’s acquisition of real estate listings website CommonFloor.
Consolidation in the consumer Internet segment, which picked up in 2015, has continued at a brisk pace in the early months of 2016.
Since January, 13 consumer Internet firms have already been acquired by peers, show data from VCCEdge, the financial research platform of VCCircle. Such deals saw a surge last year with 53 transactions reported, according to the data. Between 2011 and 2014, only 14 merger and acquisition transactions in the consumer Internet segment were reported.
With venture capital funding is not easy to come by these days, such transactions may continue, say experts.
“During 2014-15, venture capital funds were investing in ideas, but over time, as leaders emerge, investors will be backing these select companies who are leading in their segments. Those companies which are not emerging as leaders, investors are happy to keep them alive by folding them with the winners in their existing portfolio or where they find possibilities to sell them off,” said Sudhir Dash, managing director at Investec India.
One of the largest deals to be announced so far this year was online classifieds firm Quikr India Pvt. Ltd’s acquisition of real estate listings website CommonFloor (maxHeap Technologies Pvt. Ltd).
On 8 January, Mint reported that Quikr paid $120 million in an all-stock deal. In December last year, Quikr had also acquired a real estate analytics platform called RealtyCompass. RealtyCompass was founded in 2013 and was bought out in just two years.
In February, Mint reported that Oyo Rooms, the budget hotel-booking app backed by Japanese billionaire Masayoshi Son’s SoftBank Corp., acquired smaller rival Zo Rooms in an all-stock deal.
Given the paucity of cash reserves within these start-ups, a number of the deals being struck right now are stock transactions.
“Most of the transactions that have happened in the last eight to nine months have mostly been stock swaps, and also some of them are distressed sales. These deals are bound to happen when we see too many ‘me-too’ companies vying for the same audience. For example, hyperlocal and food tech firms are either shutting down or being sold off,” said Vikram Gupta, founder and managing partner at IvyCap Ventures, a home-grown venture capital fund.
Last year, venture capital funds invested nearly $5.4 billion in Indian consumer Internet companies, almost doubling their investment as compared to the previous year. Even though investments touched a record high, most of the capital came during the first half of the year. A marked slowdown in funding during the rest of the year coupled with increased burn rates led to a cash crunch for some of these firms, who could not manage to raise further capital.
According to the VCCEdge data, Series A deal activity in 2015 doubled to almost $600 million over last year, but most of this funding rush came in the first half of the year. The first six months saw 72 Series A deals worth $383 million being closed. Since July, Series A deals worth only $216 million were reported across 57 transactions.
This sluggishness in fund-raising activity hasn’t reversed in 2016, which could mean that consolidation will continue.
“In the next six to nine months we will see lot more consolidation. Clearly, with funding drying up, there are a lot of companies which have raised a seed or Series A round and are struggling to raise a Series B. And because they are still not past their burn cycle, the choice is to either amalgamate into something or shut shop,” said Nitin Bhatia, managing director at tech-focused investment bank Signal Hill.
Falling valuations are another reason why investors are pushing for consolidation.
On 26 February, Morgan Stanley Institutional Fund Trust, an investor in Flipkart Ltd, said that it had valued its stake in Flipkart at $58.9 million as of 31 December, down from $80.6 million in June 2015. The 27% cut in Flipkart’s valuation over a six-month period led to fears that a similar markdown may be needed in the valuations of other consumer Internet firms.
“Most of the capital has been raised by global investors who have previously made money in other markets like the US or China, but the Indian story has not played out as one wanted it to be. They are concerned about the correction in valuations of their portfolio companies and there is pressure on these firms on maintaining their valuations,” Dash added.
Investors are also keen to invest in newer and emerging business models, which again supports consolidation among the pure-play consumer technology firms.
“Exit valuations have corrected substantially, so therefore investors now want entry valuations to also correct substantially. Also, attention, to some extent, is shifting from plain vanilla consumer Internet e-commerce kind of business models to more nuanced situations such as SaaS (software as a service), fintech, payments, healthcare and related areas,” said Bhatia.
[“source-Livemint”]
