How

MERGER & ACQUISITION

helps you make your

IPO SUCCESS

Presentation by

DEVAN GUPTA

Partner

K M D G

K M D G & ASSOCIATES

Idea Come in to Mind

MPV�( Minimum Viable Product)

Complete Product Development

Raised First round of Funding

“Family & Family Round”

Scaling of Business Model

Spending on Technology / Adding new customer base

Series A / B round from Private Equity

How the journey of Any Startups work

M&A

IPO

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YOUR

STARTUP

JOURNEY

Early-stage startup

Venture-funded or growth stage

Late-stage startup/Exit

Your Startup Journey

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Types of Fundraising

Types of Investor

Valuation

Negotiation

Term Sheet

Valuation

Report

Due Diligence

Share Holders Agreement

How funding works ?

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Types of Funding Rounds

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• PEs- KKR, Warburg Pincus, Tiger Global
• Banks- Soft Bank, Asian Development Bank, GIC

• VCs- Lightspeed, Steadview, Xponentia Capital
• PEs- Accel Partners, CX Partners, Everstone

• VCs- Blue Ashva, Guild Capital, Peak XV
• Family Office Funds- Patni Ventures, Munjal Family office

• Angels- Kunal Shah, Binny Bansal; Nikhil Kamath; Anupam Mittal
• Micro VCs- Faad Network; Circulate; Astir Ventures

How your Cap-Table will look like?

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Few Myths and clarification

MIS

Financial and Legal�Due Diligence

Commercial Due Diligence

ESG ( Manufacturer)

Trending data for last 3-5 years

Corporate Governance

Exit on Revenue and EBITDA Multiple

“Not only on revenue”

Investor Don’t Acquire loan’s ( that your personal things)

Books may vary from MIS

Whether Any ESOP policy are there ?

The Value I get in the funding whether same value I will get it in exit ?

Investor is not interested in buying the Land

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Private Equity

Equity Crowdfunding

Product

Crowdfunding

Pre Seed

Series Funding

Angel

Seed Funding

Debt Financing

Types of Funding

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Private Equity

A private equity round is led by a private equity firm or a hedge fund and is a late-stage round. It is a less risky investment because the company is more firmly established, and the rounds are typically upwards of $50M

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Angel Funding

An angel round is typically a small round designed to get a new company off the ground. Investors in an angel round include individual angel investors, angel investor groups, friends, and family

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Pre Seed

A Pre-Seed round is a pre-institutional seed round that either has no institutional investors or is a very low amount, often below $150k

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Seed Funding

Initial funding rounds for young companies aiming to grow. Typically, $10k–$2M, but larger rounds are increasingly common. Happens after angel funding and before Series A round

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Types of Funding

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Debt Financing

In a debt round, an investor lends money to a company, and the company promises to repay the debt with added interest

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Crowd Funding

Equity crowdfunding platforms enable individuals to invest in companies for equity. Investors usually contribute small amounts, but syndicates can form for more strategic investment evaluations and pooling funds from multiple investors

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Product Crowdfunding

In product crowdfunding, a company will provide its product, which may be in development, in exchange for capital. This round is typically completed on a funding platform

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Series Funding

Series A and B Rounds: Funding stages for early-stage companies, usually $1M–$30M.

Series C Rounds and Beyond: For mature companies, typically $10M+. These rounds are often substantial

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Types of Funding

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Cycle and Need of MERGER from

BUY & SELL side

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Accelerating Growth

Access to Technology and Innovation

Gaining Competitive Advantage

Enhancing Financial Stability

Building Synergies for IPO

Startups often lack the internal resources to scale quickly. M&A enables them to access established assets, customer bases, and new markets

Acquiring innovative technologies or R&D capabilities from other firms helps startups stay competitive without building from scratch

By acquiring or merging with competitors, startups can reduce competition, solidify market positions, and improve their long-term viability

M&A provides access to additional capital, cash flows, and better financial structures, crucial for the sustainability of startups

Integrating complementary services, resources, or talents enhances the operational efficiencies necessary to scale up toward an IPO

Need for Merger and Acquisitions (Buy Side)

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M & A�Strategy

Target

Screening

Due

Diligence

Integration�Pre-Clause

Integration�Post- Closure

Post�Mortem

• Align strategy with corporate goals and growth targets.
• Identify value creation opportunities in the market.
• Ensure consistency with the business model.

• Set specific financial and operational criteria for targets.
• Evaluate market position and growth potential.
• Shortlist based on strategic fit and synergy potential.

• Assess financials, operations, and legal risks.
• Analyze potential synergies and cost savings.
• Identify risks and opportunities for value creation.

• Plan integration to capture value and reduce risk.
• Complete blueprinting and mobilize teams.
• Address pre-deal rationale and due diligence findings.

• Execute and refine the integration plan as needed.
• Realize synergies in operations and strategy.
• Ensure smooth cultural and leadership transitions.

• Review success and improvement areas.
• Apply lessons learned for future deals.
• Track performance against initial goals.

Buyer side Step by Step approach

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• M&A allows founders to sell to larger entities yielding significant financial returns
• Private equity buyouts offer immediate liquidity while enabling founders to retain some operational involvement, whereas management buyouts ensure continuity by selling to existing management.

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Exit for Founders and Early Investors

• Scalability in M&A allows them to quickly access capital, resources, and infrastructure that would otherwise will be difficult to attain independently.
• By merging with larger firms, seller can grow faster, mitigate risks and maximize value without the limitations of organic growth

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Scalability

• Capabilities issue in M&A can critically impact the success of the integration process.
• Operational synergies can be overestimated, leading to inefficiencies if processes and technologies aren’t effectively aligned.

Capability Issues

• Founders may pursue M&A to accelerate growth by accessing new markets or technologies
• To create strategic alignment with complementary businesses or use it as an exit strategy to realize the value oftheir investment.

Interest of founder

Need for Merger and Acquisitions (Sell Side)

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Organization

Marketing

Solicit Initial Indications

Diligence

Solicit Detailed Bids

Final Negotiations

• Review strategy and timing
• Conduct advisor due diligence
• Prepare teaser and memorandum
• Finalize financial model and buyer/investor list

• Contact buyers/investors with teaser and NDA
• Provide memorandum
• Prepare management presentation

• Solicit initial interest from buyer/ investor
• Select parties for management meetings
• Answer follow-up questions

• Hold management presentations
• Provide access to data room
• Manage additional diligence requests
• Begin detailed due diligence (business, financial, legal, tax)

• Evaluate and negotiate bids
• Choose best options
• Draft purchase agreement and documents

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• Complete confirmatory due diligence
• Finalize contract negotiations and documentation
• Close and announce transaction

Seller side Step by Step approach

Benefits to the Founder

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CASE STUDY�Types of Merger

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Horizontal

when the two companies are in

direct competitions and share

the same product lines and

markets

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Vertical

when the two companies are in

difference production stages

(e.g., the merger between a

company and its supplier)

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Concentric

when the two companies have

the same customer base but

different products

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Conglomerate

when the two companies have

different businesses

4 Types of Merger

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Zomato and Blinkit

Horizontal Merger

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Source : Snapshot of

Zomato Financials FY24

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Mamaearth Acquisitions’

Concentric Merger

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IPO Success of Unicommerce

Established in February 2012, Unicommerce eSolutions operates a SaaS platform that streamlines e-commerce operations for brands, sellers, and logistics providers

Change in valuation

Highlights

59.3%

YoY Growth

$11 M

Pre

IPO-Funding

$280 M

Current

Valuation

$13 M

2024 Revenue

Softbank Stake Highlights

Increase 1.9x

Softbank acquired 29.2% stake in 2021

Amount in Rs Cr

Increase 3.4x

Launch of bespoke VMS

2015

2020-21

• Reached 200+ integrations
• Launched E-way bill generation

2022-23

• Revenue of INR 100+ Cr
• Launched UniShip and UniReco
• Listing at NSE

2024

• Investment by Softbank
• Launched GST e-Invoicing

Acquired by AceVector

2015-17

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Emami and The Man Company Case

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New Markets

• Market Leader Brand
• Strong Distribution

Existing Markets

• Helps Build Scale _> Consolidate Market
• Broaden the Portfolio
• Accelerate Category Leadership
• Entry in New Category
• New Capabilities

Key Attributes

Strategic Investments in Startups

Alo Frut

Growth Strategy by Emami

Inorganic Growth

2008

2015

2019

2022

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ITC and Yoga Bar Case Study

Staggered Acquisition

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Caution: Some Failed

Merger & Acquisition

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Failed cases of M&A

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How does�Negotiations Works

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Negotiations

At its most basic, business negotiations are negotiations between corporate entities, their vendors, or their employees. But there is a lot beyond that.

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Importance of negotiation in any business:

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• Conflict Resolutions
• Building Relationships
• Bargaining and Compromising Communication
• Problem-Solving

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What are fights between Buyer and Seller

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Acquirer

Acquiree

Purchase Consideration

What Acquirer { Buyer} will get

What Acquiree will get ?

Purchase Consideration

All Cash Deal

Equity SWAP + ESOPs

KMP designation for founders in Merged Entity for 3-4 years

Founder

O&M

Business Undertaking

Know-how

How M&A works

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Whether M&A happened as at one time or in a phase manner ?

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General Benchmarking for acquisition

The harder your product is to replicate, the higher the valuation multiple you'll achieve.

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Methods of

Merger & Acquisitions

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NCLT Merger

• Definition: A merger sanctioned by the National Company Law Tribunal (NCLT) under the provisions of the Companies Act, 2013 in India.

• Process:
• Requires obtaining approvals from shareholders and creditors of the merging entities.
• The merging companies must file a merger application with the NCLT along with Scheme.
• The NCLT conducts a thorough examination of the proposal, which may include hearings to address objections raised by stakeholders.
• Upon the NCLT’s approval, the merger is deemed legally effective and binding on all parties.

• Advantages:
• Provides a comprehensive legal framework and oversight to ensure compliance with statutory provisions.
• Safeguards the interests of minority shareholders and creditors through judicial scrutiny.
• Facilitates the lawful amalgamation of companies across various sectors and scales, promoting economic integration.

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Mergers through NCLT

• Legal Sanction: NCLT approval gives mergers legal certainty, protecting them from future challenges.
• Tax Benefits: Approved mergers can qualify for tax exemptions, making restructuring tax-efficient.
• Binding on Stakeholders: Once approved, the merger is binding on all shareholders and creditors, preventing disruptions.
• Streamlined Process: NCLT consolidates approvals, reducing the need for multiple regulatory clearances.
• Creditor Protection: Ensures fair treatment of creditors and other stakeholders.
• Fast-Track for Small Companies: Certain companies benefit from quicker approval.
• Dispute Resolution: NCLT handles disputes efficiently, avoiding lengthy litigation.

Disadvantages

Advantages

• Time-Consuming: The process can be lengthy due to hearings and procedural formalities.
• High Costs: Legal fees, compliance, and documentation expenses can be significant.
• Objections and Delays: Stakeholder objections may cause delays and complications.
• Complex Compliance: Extensive documentation and regulatory compliance increase administrative burdens.
• Public Disclosure: Sensitive business information must be disclosed, posing competitive risks.
• Uncertain Timelines: The process depends on NCLT’s schedule, leading to unpredictable delays.
• Risk of Rejection: NCLT can reject or modify the merger scheme, requiring adjustments.

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Business Transfer/Slump Sale

• Definition: A transaction wherein a business undertaking is sold as a going concern, encompassing all its assets and liabilities, often referred to as a slump sale under the Income Tax Act, 1961.

• Process:
• Involves a detailed transfer agreement that delineates the assets, liabilities, and operational aspects being transferred.
• Requires minimal regulatory approvals compared to a statutory merger, expediting the transaction process.
• Due diligence is conducted to evaluate the business’s financial condition, legal standing, and potential liabilities.

• Advantages:
• Streamlined process with reduced regulatory impediments, allowing for expeditious completion of the transaction.
• Facilitates rapid access to the acquired business, enhancing operational continuity.
• Offers potential tax benefits, as capital gains tax may be lower in a slump sale compared to a conventional asset sale, depending on specific circumstances.

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Acquisition of Shares through Cash or Equity Swaps

• Definition: The acquisition of ownership interest in a target company through the purchase of its shares, executed via cash payments or through the exchange of shares in the acquiring entity (equity swaps).

• Process:
• Cash Acquisition: Direct acquisition of shares from existing shareholders at an agreed-upon consideration.
• Equity Swap: Shareholders of the target company receive shares in the acquiring company in exchange for relinquishing their shares.
• Regulatory approvals may be required, especially if the acquisition exceeds stipulated thresholds.

• Advantages:
• Offers flexibility in payment structures, allowing for cash or equity as consideration.
• Provides immediate ownership and control over the target company’s operations and strategic direction.
• Potential for operational synergies and enhanced market positioning, facilitating strategic growth objectives.

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FEMA

• Cross Border and Investment by Foreign Companies

Banking

• Banks, NBFC, and Transaction Affecting License or Registration

RBI

• Acquisition of Shares exceeding 25%
• Transaction involving related Parties
• Trigger of Open offer due to substantial Sale Purchase

SEBI

• Merger And Demerger under Companies Act
• Approval of Scheme of Merger and Demerger
• Incase of Dispute

NCLT

• Merger exceeding the combined Turnover Limit set by CCI
• Transaction affecting Market Dynamics

CCI

Income Tax

• Merger – 72A, 35DD
• Takeover of shares – Normal capital gains
• Slump Sale – Sec 2(42C); 50B

Approvals Required

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Tax Implications in Mergers and Acquisitions

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Economic resource capable of creating outputs through processes

like assets, IP, materials access, or employees.

Purchase of Asset qualify business combination

Under Ind AS 103 on Business Combinations, the "Input-Process-Output" test is a critical method for determining whether an acquired set of activities and assets qualifies as a business. To apply this test

INPUT�TEST

Economic resource capable of creating outputs through processes

like assets, IP, materials access, or employees.

PROCESS�TEST

Economic resource capable of creating outputs through processes

like assets, IP, materials access, or employees.

OUTPUT�TEST

To qualify as a business, the acquired set must include at least one input and a substantive process that, together, significantly contribute to the ability to create outputs. Notably, output is not always necessary for the set to be considered a business, especially in cases like startups or businesses in early development stages.

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A common myth is that a company’s valuation during fundraising will be the same during mergers and acquisitions (M&A). This misconception can lead to unrealistic expectations, as valuations in these two scenarios are driven by different factors

Fundraising Valuation: Growth Potential and Market Sentiment

M&A Valuation: Present Performance and Strategic Fit

• During fundraising, valuations are based on a company’s future growth potential, market opportunity, and investor enthusiasm. Startups often have higher valuations due to their projected revenue, scalability, and innovation potential. Investors may pay a premium based on optimistic projections, especially in hot markets, where competition for investment is high
• In this context, valuations are forward-looking, often reflecting the best-case scenario for the business rather than its current performance

In contrast, M&A valuations are based on current financial performance and strategic fit for the acquiring company. Buyers focus on metrics like profitability, cash flow, and synergies. Unlike fundraising, M&A valuations are often more conservative, as acquirers are typically cautious about integration risks, existing liabilities, and actual operational efficiency

Myths about Fundraising Valuation = M&A Valuation

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Key Differences:

1. Purpose: Fundraising focuses on future growth, while M&A emphasizes current results.
2. Risk Consideration: Investors may pay a premium for potential growth, while buyers apply discounts for risks and liabilities.
3. Stake Sold: Fundraising usually involves minority stakes, while M&A often involves full control, influencing the final price.

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Conclusion

The myth that fundraising valuations and M&A valuations are equal stems from a misunderstanding of the different drivers, methodologies, and expectations in these two contexts. Fundraising is often driven by growth potential and market hype, while M&A is rooted in current performance and strategic fit. For founders, investors, and business leaders, recognizing this distinction is essential for making informed decisions and setting realistic expectations for the company’s growth and exit strategy.

In essence, while a high fundraising valuation might look promising, it does not guarantee a similar valuation in an M&A scenario. Proper planning, managing expectations, and aligning growth projections with business realities are crucial to navigating these differences successfully.

While fundraising values potential, M&A is more focused on realized performance and tangible benefits, which can lead to lower valuations than expected.

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For Instance Company A which is going for M&A , how its Valuation will be computed?

Valuation Methodologies and Computation

Thank You!

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Annexures

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TERM-SHEET

• A term sheet is a nonbinding agreement outlining the basic terms and conditions under which an investment will be made.
• The term sheet lays out the financial terms of the investment, how much your startup will be worth, who will control it, and who will profit the most if the company is sold or goes public. The term sheet is akin to a letter of intent.

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Is Revenue the only Benchmark for Valuation?

Revenue is not the only benchmark for valuation. While revenue is an important metric and commonly used in certain contexts, it should be considered alongside other financial indicators to provide a comprehensive view of a company's value.

Key Insights of Case Study

• Revenue Limitations: Revenue alone is not the sole benchmark for valuation.
• InnovaTech

Revenue: $50M

EBITDA: $10M

EV/EBITDA: 43.0 (high operational efficiency)

• FinWise Solutions:

Revenue: $100M

EBITDA: $30M

EV/EBITDA: 28.33 (lower efficiency relative to revenue)

• Valuation Approach:

51% EV/Revenue

49% EV/EBITDA

• Emphasizes the need for multiple metrics in valuation.

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Conclusion

This case reinforces the idea that relying solely on revenue as a benchmark for valuation can be misleading. A thorough analysis that incorporates both revenue and earnings metrics, like EBITDA, provides a more nuanced and accurate assessment of a company's value, allowing investors and analysts to make informed decisions based on a balanced view of growth potential and operational efficiency.

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Case Study: Valuation of InnovaTech and FinWise Solutions

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A valuation report can be defined as the calculation or the complete evaluation of a property which can, later, determine the total value of a property. A valuation report, in other terms, is also known as a valuation inspection

Types of Valuation Report

Valuation Report by Merchant Banker

Valuation Report under Companies Act 2013

• When a company issues equity shares or preference shares or CCD to any investor on premium then a Merchant Banker valuation is required under the Income Tax Act
• Only a Merchant banker registered with SEBI can issue the valuation report

• When a company issues equity shares or preference shares or CCD to any investor through private placement then a valuation report is required.
• Only a registered valuer registered under IBBI can issue the valuation report.

Valuation Report

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DUE DILIGENCE

In the context of startups, due diligence refers to the audit of the company carried out by angel and VC investors before deciding whether to invest or not. Hence, good due diligence practice is vital to the ability of any startup that is fundraising

Here are some reasons why due diligence is crucial before investing in a startup:

• Assessing Risks
• Validate the claims
• Understanding the market
• Evaluating the Team
• Verifying information
• Negotiating the deal.

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SHAREHOLDER’s AGREEMENT

(SHA)

The shareholder’s agreement defines the cooperation principles between the Partners, and related measures and responsibilities. 

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DIFFERENT CLAUSES OR CONCEPTS RELATED TO SHA: 

Drag-along rights: A drag-along right enables a majority shareholder to drag the minority investors to sell their shareholding to a third-party potential buyer.

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• Tag-along right: This right protects minority shareholders' interests. If a majority shareholder plans to sell their stake in a company, this right requires them to include minority shareholders and present the combined shares to potential buyers during negotiations. 

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• ROFR: When a shareholder wants to sell their shares (Sale Shares), they must first offer them to the holder of the Right of First Refusal (ROFR) at the price they've negotiated with a potential buyer. If the ROFR holder accepts, the sale proceeds. If not, the shareholder can sell to the buyer under the same terms offered to the ROFR holder.

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• ROFO: If a shareholder wants to sell their shares (Sale Shares), they must offer them first to the Right of First Offer (ROFO) holder. The ROFO holder has a limited time to respond before the right lapses. The shareholder can decline the ROFO holder's offer if they receive a better one in terms of price and conditions.