Ride-hailing major Ola’s parent company ANI Technologies announced on Friday that it will be acquiring Avail Finance, a fintech startup that provides loans to blue collar workers. Ola said that its latest acquisition will help in bolstering its finance vertical Ola Finance, which is involved in facilitating credit to its driver partners and loans for purchasing used cars.
On the paper, this acquisition deal looks pretty decent and appreantly makes a good business move. But actually even a superficial observation will make it pretty clear that this deal is marked with too many red flags. It is a bad deal for Ola’s investors and more so for the company’s IPO prospect.
Here we are sharing with our readers several convincing reasons as to why Ola’s latest acquisition makes for a bad business deal. If you’re planning to invest in Ola’s upcoming IPO then this article surely deserves your unwavering attention.
Avail Finance is owned by Bhavish Aggarwal’s brother:
The most controversial aspect of this deal is that Avail Finance is owned by Ola’s co-founder and CEO Bhavish Aggarwal’s brother Ankush Aggarwal. But the more critical aspect and the one that deserves to be noted is that off late Avail Finance business has been struggling. The COVID infused pandemic appreantly took a toll on Avail Finance’s business as the startup struggled to increase its loan book size. The inability to increase loan book size clearly had a adverse impact on Avail Finance’s cash flow and operating revenue. According to Entrackr, company’s operating revenue dropped 20% to Rs 4.48 Cr in Fy21 from 5.59 Cr in Fy20 while the startup continue to remain a loss making entity even in FY21. The company clocked a loss of Rs 37.21 Cr in FY21.
Avail Finance being a loss making entity is actually not a big deal since most of the startups are anyways loss making entities. But the bigger question is the fact did Avail Finance lost the appetite and confidence to exist and increase its business as a standalone entity.
Did Avail Finance’s repeated failure to increase its loan book size and customer base depleted its confidence. If the answers to these questions is indeed yes then this brings us to a critical question: By acquiring Avail Finance has Bhavish Aggarwal played a brotherly act and saved his brother’s drowning business. And by doing so has Bhavish Aggarwal not set a example of bad corporate governance on behalf of Ola.
The acquisition almost appears to be a distress deal:
Will Avail Finance add any strategic value to Ola’s finance business is essentially a hypothetical question. But there is probably little scope for doubt that this acquisition is by all possible means a distress deal for Ola. Although Ola has not disclosed the financial details of the deal, Moneycontrol claims that this deal is worth $50 Mn and the deal will be transacted through share swap deal. If the price quoted by Moneycontrol is indeed correct then this deal can’t be termed as anything but a distress deal.
To the best of our knowledge, Avail Finance has till date raised $38 Mn – $40 Mn through several equity and debt funding rounds, which is 10 Mn – 12 Mn less than its quoted sale out price of $50 Mn.
When any startup is sold fractionally more than its actual funding amount then it is safe to conclude that the concerned startup won’t offer any strategic value for the acquiring company. Worse, as mentioned above, Ola has acquired Avail Finance through a share swap deal. This entails that Ankush Aggarwal will get a stake in Ola’s parent company ANI Technologies. It is still not known how much stake Ankush Aggarwal will get in Ola’s parent company. That said, Ankush Aggarwal getting a stake in Ola is akin to a gift served on a platter. Simply because his company Avail Finance is practically bringing zero business value for Ola.
Ola’s investors raised a red flag
According to Moneycontrol, Ola’s investors are not exactly happy about this acquisition deal. However, the identity of investors who expressed their concerns over this deal could not be ascertained. But Moneycontrol claims that some investors expressed their displeasure not only over Avail Finance’s weak financial metrics but also the fact that this deal leads to related party transactions.
Over the years many companies have resorted to related party transactions for pulling off accounting malpractices and even accounting fraud. Not surprisingly, today the term ‘related party transactions’ has almost become synonymous to financial malpractice. This is not to say that Ola will also resort to such tactics but at the same time such a possibility cannot be ruled out.
Avail Finance’s face off with RBI
According to Mint, last year Avail Finance was notified by RBI for circumventing its rules. The fintech company was found to be giving big ticket loans and using its own money for the same, a privilege that is only granted to NBFCs. It must be noted that till date RBI has not granted NBFC license to Avail Finance. The latter had submitted an application for NBFC license but back then RBI rejected it.
Avail Finance eventually got away quit lightly as RBI did not impose any heavy penalty on the fintech company. That said, this fiasco put a spotlight on Avail Finance’s lack of corporate governance.
Ola’s struggle to raise funds before its IPO
Should Ola opted for a distress acquisition when it is reportedly struggling to raise pre-IPO funding and that too at a lower valuation. Shouldn’t the ride-hailing major stayed away from such a controversial deal when investors sentiments aren’t exactly positive and is probably barely months away from its much hyped up IPO.
Whatever be the compulsion, this particular acquisition has brought lot of bad press for Ola and the timing could not have been more worse. It certainly would be an exaggeration to claim that this deal will have an adverse impact on Ola’s upcoming IPO. But its rippling effect could be felt in company’s forthcoming fundraising round, which it is seeking to raise at a much lower valuation. If grapevines are to be believed then the ride-hailing major has agreed to take a slash on its valuation for its pre-IPO round.
Ola’s agreeing to slash its valuation is somewhere a strong hint that the company’s stars aren’t glittering bright.
After reading all the above arguments and opinion, do you really think that Bhavish Aggarwal should have really pulled off this brotherly act and rescued his family business. Should Aggarwal not demonstrate higher business ethics and business acumen and stayed away from this controversial deal especially when the company is barely months away from its IPO.
Do leave your comments below. We would love to hear from our readers what they think about this latest story.