Technology
Technology
India's tech M&A activity set for 2024 in resilient and confident shape
- TMC start-ups faced with tightening funds have rethought strategies and are opting for consolidation with larger firms
- A surge in AI-related activity in 2023 included strategic alliances and substantial investments with a focus on cloud infrastructure, language models and generative applications
- India's Competition (Amendment) Act, 2023 has brought about sweeping changes to the M&A regime but the tech sector faces uncertainty around new data privacy regulations
Despite uncertainty surrounding elections across the nation, the outlook for TMC mergers and acquisitions (M&A) in India remained positive in 2023 and looks set to remain confident for 2024.
Investor and dealmaker activity in India's TMC sector continues to be significant amid the growing adoption of digital technologies and IT-enabled services. As India makes continued efforts to enhance its geopolitical positioning and bolster international alliances, confidence continues to grow among investors in the country's economic prospects.
M&A strong in India
Domestic transactions dominated the India M&A market, primarily fuelled by increased investment from private equity firms in the post-Covid era. Investor confidence in India's growth trajectory was another key driver for this activity, including for the TMC sector. Indian companies navigated high interest rates and inflation successfully by maintaining robust balance sheets and catering to a sustained growth in domestic demand.
Post-Covid consolidation
Following the pandemic, there has been a slowdown in funding and macroeconomic challenges in India. This has forced companies to shift their priorities to profitability and unit economics. According to a recent PwC report, funding for Indian start-ups dropped by 33% in 2022 compared to 2021, and there was a further 75% decline in the first quarter of 2023 to $2.8 billion.
The tightening of funds has prompted start-ups in the TMC sector to rethink strategies. There is now greater focus on reducing cash burn through restructuring, which is resulting in retrenchments and cost overhauls. But in this capital-constrained environment, M&A activity in the TMC sector has remained resilient. Indian news service Inc 42 reported that only 95 M&A transactions took place in first three quarters of 2023, as against the 205 that took place in 2022. Faced with limited funding and closure, many start-ups have opted for consolidation with larger firms.
Collaboration in AI
As was the case globally, India also witnessed a significant surge in AI-related activity in 2023, including strategic alliances and substantial investments. There was an intensified focus on cloud infrastructure, language models and generative applications. This was underscored by Nvidia's recent AI collaborations with Reliance Industries and Tata Group, and Infosys' colossal $2 billion deal for AI and automation services over five years. These partnerships emphasise the growing significance of AI, cloud computing and cybersecurity.
Emerging technologies in Internet of Things, augmented and virtual reality, hyper automation and low-code and no-code platforms also garnered strong interest. Large strategic buyers and services players have acquired equity in companies for access to their intellectual property in those technologies.
In 2023, e-commerce, software as a service (SaaS) and enterprise software sectors have continued their pre-eminence in India's M&A market. Business to consumer (B2C) e-commerce led all sectors with 11 acquisitions, followed by the SaaS and enterprise software sectors, each recording 10 deals. These B2C, SaaS and enterprise software areas are expected to remain strong in 2024.
However, investors are exiting the "quick commerce" segment and this is driving market consolidation and the potential development of duopolies as seen in the food aggregator market. Fintech, despite better funding compared to other sectors, is also expected to consolidate. Over 10 fintech M&A deals in 2023 involved NBFC (non-bank financial company) lenders, internet-first lenders and alternative lending platforms. This signals a push towards more profitable areas within the sector.
Regulatory framework in 2023
The implementation of the Competition (Amendment) Act, 2023 in India brought about sweeping changes to its M&A regime. Notable changes included the incorporation of "hub and spoke" cartels, the addition of appreciable adverse-effect analysis of consumer harm, and the introduction of a limitation period for filing inquiries.
Other significant reforms brought in by the competition legislation ranged from an increase in penalties for false statements and setting deal value thresholds for combinations to the defining of the concept "control" based on "material influence" and the revision of procedural timelines to expedite transaction approvals.
Status of data privacy law
India is becoming a hotspot for tech innovations and advancements. This is fuelling interest in M&A as corporations seek to acquire cutting-edge technology and talent to bolster their digital transformation initiatives.
However, amid this growing momentum behind innovation and entrepreneurship, the tech sector faces uncertainty around new data-privacy regulations that are currently without a specific enforcement date. M&A strategies may change as companies have to factor in potential compliance costs with new rules
Resilient valuations
In the initial nine months of 2023, the combined value of M&A transactions more broadly in India took a steep 69% year-on-year decline, reaching $50.8 billion by September 25. The sharp downturn was attributed primarily to a bearish investor sentiment that was triggered by escalating global interest rates and geopolitical uncertainties. India's M&A deals recorded in 2023 were at their lowest level for the past eight years, according to global news service Bloomberg.
Despite the slowdown, India emerged from 2023 as one of the few markets globally where valuations have not undergone significant corrections. India has retained its position as a market with some of the highest valuations relative to other territories worldwide, both in the public and private space.
In India, a company's valuation holds significant importance in cross-border M&A deals, particularly when foreign investors sell their investments to local entities. Law mandates that the transaction occurs at a price not exceeding the fair market value determined by a chartered accountant. Valuations holding firm in 2023 is positive news despite the complexity added by the "fair market value" requirement, which may make it challenging for foreign investors to realise the full value of their investment
Innovation powers India tech M&A
The tech M&A landscape in India throughout 2023 has shown resilience amid challenging global market conditions and regulatory shifts. The tech sector enjoyed significant growth through strategic alliances and substantial investments, reinforcing its importance in India's corporate landscape.
As India continues to evolve as a tech innovation hub and geopolitical player, its tech M&A activity reflects the country's adaptability and growth potential. In 2024 and beyond, regulatory shifts, technological advancements and investor sentiment will continue to shape the tech M&A landscape in India, offering opportunities as well as challenges to businesses navigating this dynamic environment.
Authors
Kalindhi Bhatia Senior Associate, India kalindhi.bhatia@btgadvaya.com
Prashant Daga Associate, India prashant.daga@btgadvaya.com
Juhi Mehta Partner, India juhi.mehta@btgadvaya.com
Sara Valentine Partner, UK sara.valentine@osborneclarke.com