Most of us, at one point or another, have ranted about the minuscule scale of Pakistan’s corporate sector that boasts very few players who can truly be a part of the big boys club even regionally, let alone globally. While that can be attributed to countless factors, one of them is the lacklustre mergers and acquisitions (M&A) activity in the country as most big businesses shy away from consolidation and often prefers to keep control within the family.

This is in stark contrast to the global scene where M&A hit record levels in 2021, with a total exit value almost at $5 trillion across more than 38,000 deals, according to Pitchbook. Unsurprisingly, information technology was one of the key drivers of this activity, as evidenced by transactions like Microsoft’s $69bn acquisition of Activision Blizzard, accounting for almost $900bn in deal value.

Of course, none of this is news to anyone. Big (and relatively less big) tech companies are known to eat up smaller rivals to not only tackle competition but also to grow inorganically. Facebook’s acquisition of Instagram a decade ago is one of the most commonly known examples in this regard. On the other hand, such deals provide an exit avenue for startup founders to make a handsome return for themselves and their investors and play in the major league by joining the industry leader. Unlike the initial public offerings (IPO), there is potentially less market risk if the transaction is primarily in cash.

Consolidation and acquisition by a foreign player looking to enter the Pakistani market will be the primary exit route for most local startups — exit via IPO is not really an option for VC-backed companies as their existing valuations are too high for the public market

However, when it comes to Pakistan, local startups do not have too many options. “Consolidation and acquisition by a foreign player looking to enter the Pakistani market will be the primary exit route for most local startups. Exit via IPO is not really an option for venture capital (VC) backed companies in Pakistan as their existing valuations are too high for the public market,” says Mubariz Siddiqui, a startup lawyer who has been closely involved in various venture investment and acquisition transactions.

“This is not necessarily a bad outcome for the startup founders who are getting acquired. In most cases, the acquisitions are cash plus the stock of the acquirer. The founders are retained and can still work on their mission with more resources. The potential monetary outcome for the founders may not be as high, but neither is the risk,” he adds.

Barely two months into the year and we have already gotten a glimpse of that. For Komail Abbas Naqvi, the co-founder of FindMyAdventure (FMA), which was recently acquired by Bangladeshi startup GoZayaan and became its Country Managing Director, consolidation was always on the cards. “There are limits to growth in the local market as much of the travel and tourism activity is done via offline channels and if you want to compete with that then online players need to join forces,” he says.

In fact, back in 2019, at a tech conference in Karachi, FindMyAdventure had announced it was acquiring KTown rooms, a hospitality startup inspired by India’s Oyo. While the deal eventually fell through, Mr Naqvi’s resolve stayed put. “Our expertise from the first day has been tour packages and travel was something we had to get into. Either we could start everything on our own from scratch or consolidate with players who had the relevant skillset, which seemed like a much quicker way to scale.”

So when Mr Naqvi first spoke with the GoZayaan team on Oct 22, 2021, it was a ‘merge at first sight’ kind of moment. By early November, the Bangladeshi startup’s founder had taken the approval from his board and soon after, the formal process began until the deal was officially closed in early February. The motivation to go cross-border was borne out of the fact that both countries on their own still have a pretty small share of overall spend done through online channels but combined, they presented a sizable opportunity.

“If you add up the travel and tours industry in Pakistan and Bangladesh, the combined market comes out to be over $15 billion, which becomes exciting,” says Mr Naqvi. In the new partnership, GoZayaan is bringing in the technology for flights and hotels booking, which the erstwhile FMA had been lacking, while Mr Naqvi’s team is sharing their learnings in the tours space with the Bangladeshi colleagues.”

However, this is just the first step, says Mr Naqvi. The next target is an expansion to another market, such as Sri Lanka where tourism is a major part of the local economy or much farther geographies in Africa. That’s the only way to sustain a high growth rate.

Similarly, Walee — an Islamabad-headquartered influencer marketing and social commerce platform — acquired Mirrorr.com from UAE a few weeks back. Here again, Founder CEO Ahsan Tahir was guided by the fact that the Pakistani market on its own is not big enough, not for a unicorn at least (a private company with a valuation of $1bn or more) or to achieve the mission he had set forth for his startup.

“This made the Middle East and North Africa (MENA) a natural frontier for us where the revenues are far higher while international brands in social listening, for example, were barely covering the region. Their solutions are mostly in English and do not capture the local nuances of those countries, which created a gap and presented us with an opportunity,” says Mr Tahir.

Around June, Walee crossed paths with Mirrorr – which basically has an AI-based video recognition tool, and Mr Tahir felt a potential synergy. By August, it had become clear to him that this was the right team to partner up with for Walee’s MENA ambitions and over the next four months, the deal was structured and executed. With the new arrangement, Walee has been reportedly valued at $50 million with Mirrorr getting $8m worth of their acquirer’s Middle Eastern offices.

If anything, this trend of consolidation should continue as the valuations, which were at historic highs in 2021, undergo some correction amid the disappointing performance of tech scrips. “2021 was a bull market for VC financing but with the value of tech stocks going down, so will the valuations of startups that are benchmarked against them. As we enter the bear market, the startups that have raised substantial capital in the bull market will lead the consolidation as well,” says Mr Siddiqui.

Published in Dawn, The Business and Finance Weekly, January 28th, 2022