“FLIP-DEAL OR SNAP-KART” By Aditya Kashyap from RGNUL, Patiala
Tracing the Prospects of a Snapdeal –Flipkart Merger
A little over a year ago, Sachin Bansal (co-founder, Flipkart) took a dig at its rival Snapdeal when Alibaba (Chinese commerce giant) announced a solo entry into the country. “Alibaba deciding to start operations directly shows how badly their Indian Investments have done so far,” tweeted Bansal. Snapdeal had raised $ 500 million from Alibaba, Foxconn and Softbank in August 2015. Kunal Bahl, Snapdeal’s co-founder retorted back, “Didn’t Morgan Stanley just flush five billion worth market cap in Flipkart down the toilet? Focus on your business, not commentary.”
It is not strange in this ever-dynamic digital world – where yesterday’s rivals can be tomorrow’s partners. Rounds of negotiations have taken place and are still on between the two home-bred e-commerce unicorns. The initiator of the talks is Softbank Corp., the Japanese investor in Snapdeal (parent company Jasper Infotech), who wants US-based Tiger Global, the biggest investor in Flipkart, to consider a merger. If this merger materialises, the deal could be a win-win for both the Indian retailers. In a major breakthrough, it would be the biggest ever merger in India’s $10 billion (Rs. 6,500 crores) e-commerce sector.
Status quo for the ‘DUO’
Snapdeal has been in trouble lately, retrenching its staff by more than half, to “drive efficiency across all parts of (its) business” as the company puts it. Its founders, Kunal Bahl and Rohit Bansal, have even foregone their salaries since this February. Bahl has written an emotional letter to the company’s staff admitting mistakes in policies and a misplaced economic model. Snapdeal, which has over a million customers on its site daily, has been struggling for the past 16 months to maintain its sales. Recently, a group of online sellers requested Nirmala Sitharaman to safeguard their money owed by Snapdeal towards them, in the form of dues. Moreover, the bleeding start-up has reported losses of Rs 2,960 crore in 2015-16, almost double that of the previous year.The company has been trying to considerably reduce its cash burn per month to about $4 million from $20-25 million last year.
Flipkart, on the other hand, which has over 100 million customers, has had its fair share of troubles too. The US mutual fund giant Fidelity slashed the valuation of its holdings in the e-tailer to around $5.58 billion (Rs 36,000 crores), i.e. one-third the firm’s peak valuation. Company’s losses too doubled in 2015-16 to Rs 2,306 crore. Moreover, it lost its numerouno position to the newbie Amazon India last year. What is perhaps becoming increasingly clear is that most investors did not anticipate the stupendous growth of Amazon in the country, driven by its better business model. Added to this is the unfulfilled dream of acche din – which the investors in the e-commerce market have been waiting for ten long years expecting profits, which is nowhere traceable.
In today’s era of consumerism, ‘customer is the king’. However, in the online space, the customer is so fickle-minded that she cares only for low prices clubbed with a great shopping experience. In order to sustain in the market, an e-tailer must meet the demands of the consumer and at the same time ensure its profitability.
Equations for the Merger
Japanese conglomerate, Softbank, which invested $900 million (Rs 5,800 crore) in Snapdeal, holds around 33% stake in the e-commerce entity. It is looking to spend as much as 1.5 bn USD($) for a double-digit stake in Flipkart. It will allow Tiger Global, the latter's main investor to retrieve the capital it has invested in Flipkart. The founders, Kunal Bahl and Rohit Bansal, hold just 6.5% stake in their start-up on sale, Snapdeal.
The discussions which initiated in February, have picked up the pace in the past two months with Soft-Bank founder Masayoshi Son getting directly involved. Softbank has been planning for three options for Snapdeal– to merge with Flipkart, combine with Alibaba-led Paytm, or a write-down of Softbank's investment to zero. However, at present – only the first option seems viable.
Snapdeal has been valued between $1.5 billion and $2 billion, but sources say it could be less than that as the company has no more than six months of cash to run its operations. Kalaari Capital, an early investor in Snapdeal and Nexus Venture Partners (NVP) finally came on board to Softbank's terms. Besides, it is also now clear that Kunal Bahl and Rohit Bansal (co-founders of Snapdeal) and owners of Jasper Infotech have unwillingly agreed to the merger.
The only way Snapdeal can now survive is – by getting acquired or merged with their bigger competitor, and Flipkart seems the only option now. If this merger materialises, the deal could be a win-win for both the Indian retailers. On one hand, Flipkart would get the much-needed support and consumer base to tackle the American giant Amazon. While for Snapdeal, Flipkart could be the saviour it needs at a time when funding is drying up.
Changing dynamics of the deal
Despite all efforts and intense lobbying for the Merger to take place, according to the latest news – The Jasper Infotech board has rejected an initial offer worth 800 million USD by the rival Flipkart. This development comes months after the initiation of the first round of talks. In a yet recent development, Flipkart has completed its commercial and legal due diligence of Snapdeal which began two months back. According to unnamed sources, it is expected that the dialogues would continue. However, the timing and value of next offer by Flipkart is yet to be revealed. In the meanwhile, Snapdeal is also on a quest to raise additional cash through sale of logistics and digital payments businesses. The deal is being steered by SoftBank, the largest stakeholder in Snapdeal and is expected to formulate at 700 million USD – 1 billion USD.
As per other news reports, the current deal is being questioned by the minority shareholders like PremjiInvest and Temasek – opposing the special pay-outs to certain shareholders (especially, the early investors).
Moreover, the legality of the deal and its structure are raising concerns amid the conundrum and melodrama circling the deal. The anticipated acquisition would have to meet the RBI rules on foreign exchange and may need a specific structuring to protect the interest of all the shareholders.
A post-merger picture for the two giants
Indian e-retail market is still in a nascent phase and is expected to grow over 40% each year. The Boston Consulting Group Report (2016) states that by 2020, some 550 million Indian cell phone users would be using the high-speed mobile internet, and the size of the internet economy (including online retail) is estimated to double to $250 billion.
India’s online sellers have been bleeding due to enormous expenses on marketing and offering unbelievable discounts. Since their inception over a decade ago, neither Flipkart nor Snapdeal has ever registered profits, i.e. so to say not even they have been able to attain the ‘Break Even point’. The cut-throat competition in the market in the coming days is yet to remain and may become even fiercer. However, due to rationing of the market, we may witness a reduction in promotional costs. Additionally, this merger will also lead to consolidation of revenues. By acquiring Snapdeal, the e-commerce giant, Flipkart will get a stronghold in the North and the North-East India; which has been eluding its presence till date.
Amid concerns of drying funds, Flipkart has managed to fetch $1.4 billion in a single go (as on 30th May, 2017). Snapdeal is on a weaker ground as compared to Flipkart and is struggling to manage its limited cash reserves. If the merger happens, the situation of cash crunch can be effectively mitigated.
While considering the impact on the popularity, there are no clear signs and statistics regarding the current popularity of the two companies. However, their popularity can be easily gauged from their mobile apps. According to data provided by App Annie, an analytics firm, Flipkart has much more downloads than Snapdeal. However, Amazon was the app with the highest number of downloads in 2016 at 32.2 million (maybe, because of its global presence vis-à-vis other players). This metric is important for both Flipkart and Snapdeal as they have increasingly been targeting mobile-only customers.
Bill Gross (founder of business incubator – Idealab) states, “The most important element that leads a start-up to success is – Timing.” The deal in the present scenario cannot be more apt for Flipkart to acquire the $6.5 Bn valued unicorn at a significantly lower price. Flipkart with its merged entities – Myntra and Jabong – is looking towards Snapdeal with hawkish eyes, to capitalise on the company’s market share and strengthen its consumer base against competition from major players like Amazon and Paytm.
Conclusively, Snapdeal-merger is the bet that will define the way the tide will turn for India’s multi-billion dollar e-commerce market.
Lessons from the ‘Big Brother’
Since 2010, Flipkart has made a total of 10 acquisitions, from WeRead, Chakpak, LetsBuy, Myntra, PhonePe to eBay. As ET writes, now all it’s got to do is to prove that wag on Twitter wrong – “The problem with Flipkart is they shop more than their customers do.”
Amazon’s model relies on maintaining low operating costs for its online sellers, thus lowering the selling price. The key to its business success in India is, its attention to the three universal core principles of online shopping, which are namely –
- a) providing a wide portfolio of products for the shoppers;
- b) maintaining low prices; and
- c) creating an enriching shopping experience.
For this, it created a gigantic infrastructure – one of a kind, for any e-commerce firm; and at present, has 34 centres spreading across 10 states. The entire monumental infrastructure is based covering a total area of over 3 million square feet with a storage capacity of 10 million cubic feet. Since its inception, Amazon India has been on an expansion spree. With its pan-India footprint and a wide portfolio of products, it offers more than 3.5 crore products across over 19,000 serviceable PIN codes in India. Thanks to all these factors and its sustainable as well as economic business model; it has emerged as India’s largest online store.
The new enterprise that is born out of the proposed merger (if at all, it takes place) must take lessons from the Amazon-experience and emulate their business model accordingly.
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