Why acquisitions don’t always work for startups

The report cited logistics services provider Delhivery’s acquisition of SpotOn Logistics, CarTrade’s purchase of Shriram Automall, Zomato’s takeover of Uber Eats India, and online travel portal Ixigo’s buys of Abhibus and Confirmtkt, all helping them “expand market share, build scale, and enter adjacent or complementary segments.”

The idea, of course, isn't entirely new, although such activity slowed sharply during the long funding winter after Covid. In fact, many startups are following the path charted by ed-tech company Byju’s, once India’s most valuable unicorn. Between 2017 and 2021, Byju’s went on an unprecedented acquisition spree, snapping up company after company.

With funders beating a path to its door, attracted by its breakneck, and seemingly unending, growth, Byju’s fuelled billions of venture dollars into acquiring as many as 17 companies in the span of a couple of years.

It started in 2017 with Pearson’s online tutoring arm Tutorvista, and Edurite, then US-based educational games maker Osmo, kids’ learning platform Epic1, and coding platform Whitehat Jr. The big splash came with the $950 million acquisition of Aakash to enter the exam prep sector, alongside smaller buys like Toppr, Hashlearn, and GreatLearning.

These acquisitions helped Byju’s expand into 20 countries, making it a true Indian multinational. At one point, its website attracted 250 million visitors a month. Things seemed to be going swimmingly—until they didn’t. The company’s grand plans collapsed, its valuation plunged, and it is now facing insolvency proceedings.

The lesson: in the world of mergers and acquisitions, it’s far harder than it appears to make two and two add up to four, let alone a larger number. Today, Indian startups, particularly in consumer Internet and e-commerce, are using buyouts to acquire customers and brands and to build numbers ahead of potential initial public offerings (IPOs). But will investors buy the dressed-up story? Not if they pay attention to history.

Most failures track back to a handful of basic reasons – overpaying for the acquisition, overestimation of synergies, an underestimation of both the real cost and the challenges of integration, cultural differences and leadership churn leading to loss of talent, as well as high debt or overleveraging.

Unpredictable regulatory risks also play a role. For instance, the unlisted HDFC Standard Life’s reverse merger with Max Life Insurance, a listed entity, was, on paper, to give HDFC Standard Life automatic listing, as well as scale and market. But the insurance regulator turned it down, as the merger plan involved Max Life first merging with Max Financial Services and then demerge the life insurance business, which would then merge with HDFC Standard Life. Since the regulator did not permit the merging of a non-insurance business with an insurance business, the deal fell through.

Outside startups, too, examples abound. Tata Steel’s $13.1 billion acquisition of Corus failed to deliver the promised global market access and specialty steels, leading Tatas to sell the European long products division for a nominal sum. Kingfisher Airlines’ buy of Air Deccan was another strategic misstep; overpayment, incompatible business models, and cultural differences contributed to the airline’s eventual shutdown.

At the end of the day, “buy to scale” often looks more attractive than it is. Consolidation has its place, particularly to reduce the number of players in overfunded sectors. But using cash to strengthen the core business and brand, and focusing on unit economics, tends to pay off better in the long run.