Consolidation phase

Indian businesses are witnessing a wave of consolidation across a swathe of sectors, including aviation, telecom and business process outsourcing (BPO). While there have been quite a few mergers and acquisitions (M&A) in these sunrise sectors, in retail it is early days yet. While the prime reasons for this consolidation wave vary in the different industries, there are some common denominators that mark the trend. First, almost all of them are sunrise sectors with relatively new players scrambling for a piece of the action. Second, this heady rush of initial enthusiasm has resulted in a fragmented market, with both big and small companies in the fray. And in many of these segments, government policies are still evolving and the regulatory framework is not fully in place. As is inevitable in such a dynamic environment, the winners will get separated from the losers at some stage.

Hyper-competition and fragmentation ensure that size matters, which is why consolidation becomes a business imperative. A small company is vulnerable to cyclical swings, and finds it difficult to attract and retain the best talent. Growth requires capital, which may not always be available. In aviation, the advent of low-cost carriers resulted in airlines cutting fares in order to grab market share""but this strategy requires deep pockets, which many of the new players did not have. The result is that a "normal" market structure is now emerging. In aviation, three large players now account for some 85 per cent of the market, something that is true in telecom as well (if you don't count the public sector players in this field).

In the BPO sector, the M&A wagon was set rolling when IBM acquired Daksh a few years back. Since then there has been a host of deals. This industry too is fragmented, with a large number of mid-size firms becoming niche players. A primary reason for the regrouping now under way is the slow disappearance of the cost advantage that Indian firms commanded, so that companies need to build scale and tap synergies to stay viable. Consolidation here is also driven by the urge to have a full bouquet of services, and to avoid being trapped in one or two specialised sub-segments.

It is early days for the nascent retail industry, where many of the players are still to make their entry, or are in the early stages of their roll-out. Still, analysts argue that with many of the firms now in the fray are bleeding, it is a matter of time before the sector sees a bout of consolidation. Scale is important, and it is those with deep pockets who will eventually rule the market. Also, policy changes with regard to foreign ownership could induce M&A activity.

All this is good for investment bankers and corporate lawyers; but it is also good for the system. Entrepreneurship is on display in a variety of forms, new ideas get tested and new business leaders emerge to give variety and depth to the Indian business world. And, of course, the consumer benefits from all the action. To be sure, there is turbulence and some people get hurt, but even that has been in only limited evidence because of the buoyancy all round.