As start-ups race ahead to acquire emerging competitors, a clutch of high-profile, big branded start-ups are debating mergers with their equally competent rivals.
Speculation about an Ola-Uber merger in India has been gathering storm since a while now. While online grocery start-ups Grofers and BigBasket are also said to be contemplating a merger.
Mergers, say experts, can have a profound impact on small/fledgling start-ups, the consumer segment and on the start-up ecosystem as a whole.
Industry data points out that in 2017, of the over 133 mergers and acquisitions reported in the start-up sector, just 3% comprised mergers, with the remaining being acqui-hires and acquisitions. A prominent merger was that of MakeMyTrip and Ibibo Group.
“What drives mergers is purely economics. The 'build versus buy' factor. Mergers are executed to align and optimise the resources that the two entities have, for gaining greater revenues and market share and to reduce competition,” says Girish Shivani, executive director and fund manager, YourNest India VC Fund.
Experts believe if Ola and Uber happen to merge someday, that entity can wipe out smaller cab aggregators and ride-hailing apps. Ola and Uber at present control over 90% of India’s taxi market that is expected to reach $14.3 billion by 2022.
Likewise, if BigBasket and Grofers merge, that entity could control over 65% of the online grocery market, which is estimated to reach $40 million by this fiscal end.
But some experts feel that big brand mergers do not necessarily produce a negative impact on the ecosystem. Praveen Raju, partner, Spice Route Legal, says the core basis for determining whether there is a negative impact is based on the anti-trust principle of ‘’appreciable adverse effect’’. “The online grocery penetration in India is probably less than 1% of the total food and grocery market. BigBasket-Grofers may together be a substantial contributor, but that would only be a very small component of consumers in the relevant market. A probable merger between BigBasket-Grofers is therefore unlikely to create any appreciable adverse effect to the market,” says Raju.
Market share is not the only condition for determining appreciable adverse effect; other factors such as availability of substitutes, barriers to entry, ability to innovate, etc, also play a factor, he says, adding “In contrast to BigBasket-Grofers, an Ola-Uber merger may need a closer evaluation as they contribute to 90% or more of the cab aggregator space and the consumption is fairly spread out across the country.”
But such mergers could impact other budding start-ups. According to Gauravkumar Kate, co-founder, LegalDocs, the merger of big players usually creates turbulence for smaller start-ups, as “decision-making, contracts and funds get stalled when the overall landscape is changing”.
Also, mergers curb market competition. ‘’The merged entity creates a larger entry barrier for competition by creating a larger market share,” says Shivani. According to Raju, it is not the reduction, but the elimination of competition in different forms that could prove bad in free-market economies. “An ideal market is one with multiple players. But there will be consolidation as players want to grow and become large.”
Mergers may spell mixed news for consumers. Strategic mergers are healthy, since services get better and cheaper for consumers over time, due to shared infrastructure and less marketing expenses, says Kate.
“If all of this actually happens, the consumer is the winner. However, a merger can be negative for consumers if the entity restricts competition and consumer choice, which can lead to increased prices for consumers. The more fragmented market share that players have in a particular sector, the better it is for consumers and start-ups as there is little to no concentration of pricing power in the ecosystem,’’ says Shivani.