How M&As in SME sector are helping the ecosystem

The small and medium enterprises (SME) sector is expected to be the driving force for the Indian economy in the years ahead. The sector is expected to contribute $2 trillion and create 50 million additional jobs by 2024, as India aims to become a $5 trillion economy.

There are a lot of mergers and acquisitions (M&A) across industries. India has shown a phenomenal increase in M&A during 2020-21. There were $82.3 billion M&A deals (pending and completed) in the second quarter of this year. That is the highest on record - more than twice the $38.1 billion in the third quarter of 2019 and almost twice the $48.9 billion in 2021. Technology, media, telecom, and financial services are the most active sectors.

In the post-pandemic era, businesses have had to rework strategies & priorities, and the situation pushed SMEs to find ways to recover and reinvent themselves to find a stable footing. Remote working, digitalization, cyber security norms, new customer interaction & payments practices, and a general expedition in project deliveries have been significant highlights as SMEs traversed this journey with their specific dynamics.

Every stakeholder feels the rippling effect of M&As in the ecosystem. The strategy presents opportunities for portfolio diversification, market expansion, increased R&D, higher levels of subject expert guidance, and access to global operational means. M&As help corporations grow, expand offices & operations, create more skilled employment, innovate products & services and push overall growth. When levels of competitiveness intensify, consumers benefit as companies try to gain their competitive edge.

M&As strategically lend a competitive edge to SMEs, and the synergetic combination of talent and resources can aid financial growth and shareholders’ worth in the long run. Moreover, when a bigger business steps in, SMEs benefit from the availability of enhanced protection for intellectual property, trademarks, and design and greater access to quality human capital.

M&A could emerge as peer-to-peer mergers or pure acquisitions. In the first case, combined capabilities form a greater potential for expansion and growth. In the latter scenario, unique disruptive technologies enter, and the customer base expands. The speed-to-market benefits too.

Around the same lines, acqui-hiring picked up pace as businesses worked around filling market gaps to pick up talent from startups and SMEs. The right talent pool lends to improving product quality and spurs growth. Take DoSelect, for example - one of the latest such cases. This skill assessment platform got acqui-hired by Infoedge, the parent company of Naukri.com. Or Under45 - the venture that came into the limelight for powering vaccination slot alerts on Telegram, which got acqui-hired by the health & fitness app HealthifyMe.

In the technology industry, where M&As witness the entry of global giants, specialized talent, refined governance, and access to global funds are gained. Take the acquisition of Billdesk by PayU Payments, a Netherlands-based payment gateway, for example. As digital retail payments increased to $44 billion in 2020-21, this $4.7 billion acquisition is noteworthy.

When the proposed M&A integration is administered well, it helps the incumbents, the market, and the economy with more employment opportunities, R&D budgets, capital flow, increased return to shareholders, and growth opportunities. They are especially a boon to companies struggling to stay in the market but not wanting to sell their DNA.

The things to watch out for are accountancy issues, taxes, permissions, legalities, dues, the material cost of the processes involved, rebranding costs, and possible (maybe temporary) devaluation of equity. But they are challenges that can be managed for the more significant gains that M&As bring.

To make the M&A deals work efficiently, the acquiring business needs to be clear on the strategy (overall expansion, revenue growth, talent pool, or geographical expansion). A sharp, proactive search for potential companies backed by implementation diligence should make this flow beneficial to both parties. Eventually, it is about building suitable models for overall growth and increased operational efficiency.

Sameer Jain

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Sameer Jain is Chair - NASSCOM SME Council and Founder & CEO of Net Solutions.