Slowdown fears derail M&A deals, funding prospects

Recessionary fears have started to impact the mergers and acquisition (M&A) market. Latest victim is the Prosus, the investment arm of South African multinational Naspers terminating the $4.7 billion acquisition of online payments gateway firm BillDesk by the Dutch-listed company's Indian subsidiary PayU Payments. Amid slowdown concerns, equity markets world over has seen sharp correction. This is cited as the primary reason behind Prosus cancelling the takeover deal of PayU, which was touted as one of the biggest acquisitions in the fintech space. If the deal had gone through, this would have been the second-largest buyout of an Indian digital technology startup after Walmart's $16 billion purchase of a majority stake in Flipkart in 2018. In a note published on Prosus' website, Eoin Ryan, head of investor relations, said, "certain conditions precedent were not fulfilled by the September 30, 2022, long stop date, causing the agreement to be terminated automatically."

The company, however, didn't elaborate the conditions of the takeover deal. Most new-age companies operating in the fintech space, in the US and other markets have lost more than 50 per cent of their valuation in recent times. Even the perception of valuation has changed among investors as stocks of newly listed companies across the globe got hammered. Such disconnect between what public markets are willing to pay for the company and what private investors are paying is leading to rethinking on many M&A deals that were announced before the recent market crash.

In recent weeks, edtech firm Byju's was in news for valuation drop. India's second-most valued startup may, since this inception, faced a down round. It raised funds at a lower valuation than its previous funding round. Its current valuation of $22 billion is raising many eyebrows now. Apart from such private valuations, public valuations of recently-listed new age companies have gone through sharp corrections. Be it Paytm or Zomato, share prices of these companies are trading a way below their listing price. Meanwhile, funding winter continues to roil the startup ecosystem in India as the funding decline continued for the fourth straight quarter.

Startups on an aggregate basis raised $3 billion during July-September 2022, which was about 50 per cent lower than the preceding quarter. It stood at $11.8 billion in the first quarter of 2022, while total fund raised was at $6.8 billion during the second quarter. Only four mega deals that is worth $100 million or more each was seen during the July-September period. As expected earlier, late stage funding took a beating while early stage funding remained healthy during this period.

In this perspective, it will not be an exaggeration to say that the perception regarding startups is rapidly changing among investors. Everyone is now interested to know the profitability aspects of these new age companies than concentrating on the revenue growth. In the coming days, we shouldn't be surprised if valuation methodology of startups also sees a sea change. Anyway, narrowing the gap between public and private valuation augurs well for the startup world as it will bring more trust and encourage good companies to go public on exchanges.