Mergers and acquisitions aren’t easy in startups because of the involvement of many complex aspects from valuations to integrating founders, to taking care of pre-existing investors to due diligence. Every element can be a challenge. Not to mention the most common case where the acquirer and acquiree are scales apart in terms of size and clout.
In this case, while the potential acquirer always has the option of saying yes or no at any point in time till the deal is finally sealed, the acquiree has very little room to have a say, considering that it is very likely that its size and clout is comparatively small to the acquirer.
Plus, keep in mind that when it comes to startups, the cost of negotiations can be very high, in terms of management bandwidth, and funds in hand to keep going in some cases. Thus, with time, the leeway to negotiate only goes down, not up, for the smaller firm.
A fact that has proved to be deadly for more than one.
For example, OYO’s negotiations with ZO Rooms, where the former walked out at the last minute of the deal. Curefit did the same with BookYourGame recently. Though, BYG at least had the consolation of an out of court settlement. These cases are only the tip of the iceberg, with the startup space littered with incidents that raise a question mark on the professionalism and ethics of the people and firms tasked with acquisitions.
On the lines of OYO-ZO and Curefit-BYG saga, RentOnGo seems to have faced a similar situation. RentOnGo was operating as a two-wheeler marketplace till January this year. According to Nikhil Chhabra, co-founder and CEO RentOnGo, it had pulled the plug from operations at the beginning of this year as its acquisition by Bounce was only inches away.
However, months later, the deal is yet to be materialised, and Chhabra has lost hope. So what happened? Was Bounce unprofessional and low on ethics? Let’s start from the beginning.
During July-August 2018, Chhabra and his company realised that bike rental game is a cash guzzling business without any moat. Hence, he started looking for an M&A opportunity.
“We began the discussion with Bounce last August, and soon both parties agreed to a deal. The initial paperwork was completed by the end of October, and due diligence process was in place by mid-November. By January all processes completed for the deal,” said Chhabra to Entrackr.
As a part of the deal, Bounce also had to absorb 20 employees of RentOnGo. However, only two were offered an opportunity. “The remaining 18 RentOnGo’s employees were informed 12 hours before their actual joining that Bounce couldn’t absorb them,” adds Chhabra.
By early February, Chhabra was getting restless because of unnecessary delay in completing the deal from Bounce. He kept writing emails to Bounce co-founder Vivekananda Hallekere and others for an update on the proposed acquisition. However, he never heard back.
“It was sheer unprofessionalism as well as unethical. How can a startup do this to another?” said Chhabra.
While Chhabra has alleged several unfair and unethical practices on Bounce’s part, Hallekere has a different story. According to him, Bounce had communicated to Chhabra that the company wasn’t going ahead with the deal. RentOnGo had come to Bounce through its investor – TVS.
“Our initial proposal was to give TVS equity for their holding in RentOnGo, later we decided to evaluate the acquisition. During the legal due diligence, we found that a majority of RentOnGo’s vehicles weren’t having requisite permission as vehicles didn’t hold a commercial licence. Hence, acquisition of the asset was out of the question,” said Hallekere.
According to Hallekere, Bounce offered RentOnGo an option to continue the operations under its brand name. However, Nikhil didn’t agree. “The biggest disaster happened when RentOnGo sent a notification to all users that it wound-up operations. The notification had killed the deal as we were getting nothing out of it – neither vehicles nor users,” he added.
While we don’t know who is at fault and who is not, cases of unprofessional and unethical behaviour are on the rise in the Indian startup ecosystem. When it comes to M&A, the acquirer invariably looks to dominate.
In such a scenario, the company, which is seeking an acquisition, is likely to receive a cold response from the acquirer. On a different note, founders and employees of a smaller entity in a merger or acquisition, are usually ignored unless it is an acquihire, where the acquisition has been made precisely to hire the tech founders and their expertise.
This can be gauged from the fact – how many founders continue working with joint entity till the merger or acquisition contracts mature? Factually, a few. It won’t be an exaggeration to say: founders rarely continue with acquirer after the acquisition.
We, as an ecosystem, need to relook how founders treat acquisitions. The onus is obviously on the firms making the acquisitions, because going by these stories, and the many other cases of acquisitions that never happened, successful integrations can only happen with mutual respect, and appreciation of the value each firm brings to the table. And transparency at all stages on how the acquirer plans to move after the acquisition.
Of course, with most startups usually run by young, tech founders or other professionals, the legal aspect of these negotiations is ignored by many, that can lead to grief at a later stage. We have seen this multiple times in terms of premature celebration of a merger, poor understanding of specific clauses and finally, feeling helpless when it comes to asking for damages in case of a late letdown.
To that extent, BYG was probably brave to go legal, and lucky to have proved its point.