What drives small businesses to acquire bigger, tougher rivals?

As the recent PharmEasy-Thyrocare agreement shows, the reason is financial, strategic or a combination of both.

The acquisition of PMC Bank allows BharatPe to offer its fintech services to the large existing clientele of a historical player in the sector.

In the world of commercial transactions, companies generally buy smaller players who promise to contribute significantly to their own operations. Alternatively, companies buy or merge with their peers in the same industry, roughly equal in size and market dominance.

The concept of smaller companies buying larger companies – not uncommon in the western world – has now started to take off in India significantly. The reasons vary from the need to reduce competition, to gaining access to specific products or markets, to expanding the customer base with that of the biggest rival.

Sometimes the purchase of a large publicly traded company allows the smaller company access to public market funds, although there are strict regulatory standards to meet.

No rival is too big


By listing examples, a India time report highlighted the recent surprise announcement by PharmEasy, a six-year-old pharmaceutical e-tailer, to buy diagnostics giant Thyrocare, a 26-year-old publicly traded company. Among other examples, three-year-old fintech company BharatPe and Centrum Finance are set to take over 37-year-old Punjab and Maharashtra Cooperative (PMC) Bank under the Reserve Bank of India’s directive.

Similarly, edutech player Byju’s has acquired 33-year-old test prep company Aakash Educational Services – which has helped thousands of Indian students pass the IIT-JEE and other engineering entrance exams. and in medicine over the decades – for $940 million.

Financing possibilities

The way small companies fund giant deals is varied. PharmEasy, an e-commerce unicorn (a start-up valued at over $1 billion), raises $300 million in fresh capital to fund its latest acquisition. Additionally, he is selling a 5% stake in himself to A Velumani, founder of PharmEasy, although this is seen as more of a strategic than a financial move.

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Typically, smaller buyers in such deals have deep pockets – they are well funded by high profile private equity or strategic investors. In addition, they mainly benefit from high valuations, which allows them to trade stocks with larger companies. For example, Byju’s, which is again a unicorn, used the stock exchange option, outside of cash, for its purchase of Aakash.

Support from global investors not only gives start-ups strong financial backing, but also access to strong strategic direction. The scouting of potential targets, the many rounds of talks and negotiations, and the timing of post-deal operations – all of this is framed by investors.

The need for such acquisitions

Small companies only buy larger ones when there is a substantial gain to be made. An online player like Byju’s might need a traditional operation like Aakash to get instant access to physical courses in all parts of the country.

Throcare presents a similar opportunity to PharmEasy. The former also offers a wide range of services that can help the latter immediately scale up its operations.

It’s not just about making gains for start-ups. Older companies, by being taken over by smaller rivals, mainly benefit from the injection of funds. Moreover, the change in management style – generally more agile and open to innovation – can revive operations in decline.

Win-win combinations

For BharatPe, the RBI-led deal to take over PMC Bank helps it use the partnership with co-buyer Centrum to expand its product offering, another said. HAVE report. Under this plan, BharatPe and Centrum will establish a new Small Financial Bank (SFB) which will take over PMC Bank.

Moreover, having a traditional bank like PMC in its fold means that BharatPe can reach a huge and loyal customer base with its fintech products. Merchant acquiring becomes relatively seamless, as issues like KYC (know your customer) standards are already taken care of.

For PMC Bank, of course, the deal means a revival of its operations – essential not only to its survival, but also to the lifetime savings of many customers.

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