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M&A strategy – ‘string of pearls’ vs

               big ticket acquisitions

               By Chandru Chawla, Head Corporate Strategy, M&A and New Ventures, Cipla

               It seems to be M&A season in India – with      realign the business strategy to meet the
               Snapdeal, Flipkart, Myntra, Jabong and         growth vision.
               Vodafone amongst many others, in the
               spotlight. Globally, M&A activity stood at     At Cipla, we look at all three aspects –
               about $3.9 trillion last year. India alone     mergers, acquisitions and divestments –
               saw about $61.2 billion worth of M&A           as elements of a long term strategy to
               activity in FY17, a figure that is more than   enable our vision for the future.
               double the previous year.

               It’s worth taking a look at the entire M&A     Two approaches
               space in India and analyzing what’s            Typically, companies follow one of two
               happening. The central idea of any M&A         approaches – the string of pearls
               is to shape corporate development.             approach, where the M&A strategy is to
               Therefore, the most common factors that        acquire a series of smaller units, or the
               drive M&A activity are diversification and     big ticket approach, where the
               growth, a good example of which would          acquisition is substantial in size and
               be Amazon’s acquisition of Whole Foods         valuation. Interestingly, some of the
               and Zappos. Other factors include the          effort in both cases – such as identifying
               need to secure the supply chain by             and understanding the opportunity, and
               acquiring units for backward integration.      the execution of the M&A – is similar.
               Companies also use M&As as an entry
               ticket to new markets or geographies.          So what drives the choice of approach?
               The Vodafone-Idea merger is an example         Often, the M&A strategy is dependent on
               of going the M&A route to gain                 the maturity level of a company and the
               marketshare and reduce competition.            industry. More mature companies may
                                                              opt for a big ticket, more impactful
               But of late, we have seen examples of new      acquisition that will help consolidate the
               factors driving M&A strategies – for           position in the marketplace.
               instance, the role of matchmaker played
               by the US government in the Bank of            Early stage companies may prefer the
               America – Merrill Lynch acquisition.           string of pearls approach as it allows
               Sometimes, a new acquisition is targeted       them to diversify risks across smaller
               to get access to its investors, who then       bets. A disclaimer here: although,
               come on board the parent entity. Then          intuitively the string of pearls approach
               there is the need for new competencies in      appears to be less risky, often smaller
               the age of Industry 4.0 – companies find       companies carry a higher discount factor.
               M&As a fast route to gain critical             When we model the integration, we
               technical capabilities and shorten the         factor in more conservatism in the
               time-to-market.                                numbers, because there is a higher risk in
                                                              assimilation. So the string of pearls
               On the flip side, divestment of units is       approach may not be a sure bet in all
               also a core part of M&A activity as it         cases.
               allows companies to trim assets and
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