Recently, Boardroom discussions were held at the possible acquisition of Snapdeal by its bitter rival Flipkart. Such a move could bring in a fresh wave of competition to Amazon who is currently dominating the market. However it remains to be seen whether there is enough firepower for Flipkart to take the e-commerce market by storm.
Snapdeal started in 2010 and was backed by good funding to become the one of the largest e-commerce companies in India. The company had reached its peak valuation of $6.5 billion in 2016 and had survived the mutual fund markdown without sustaining a hit.
However, Snapdeal since then went into a steep decline and its employee count dropped by 60 percent and the market valuation fell down from $6.5 billion to below $1 billion. Faced with a dire situation talks of a takeover of Snapdeal by its prime competitor Flipkart started. Now we are very close to the eventual merger although a lot of decisions are still left.
Flipkart has raised $ 1.5 billion from eBay, Tencent and Microsoft as the talks of a merger are progressing fast with Snapdeal. It is set to raise a total of $2 billion for the current round. The remaining $500 million will be coming from the Internet and telecom conglomerate Softbank.
Reason for Merger
Snapdeal wanted to run a pure-play marketplace however this was difficult because their sellers were not ready to serve the customers who purchase online. Also, they are unable to compete with Amazon’s customer service. Snapdeal wanted to use the marketplace model because they thought it would be a cost-light model. Snapdeal also were focused on chasing sales and gross merchandise value (GMV) but they failed to recognize the importance of customer experience.
As a result the loyalty of customers was not with Snapdeal and on the lower side they lost to ShopClues. On the higher side, Amazon dominated the market and Snapdeal failed to compete with it.
Combined with that Flipkart’s valuation also dropped from $15 billion to $10 billion and faced with Amazon’s relentless growth a merger seems to be a sensible solution.
This deal is all set to be the biggest acquisition in Indian e-commerce space. It will also redefine the online retail market where China’s Alibaba and America’s Amazon are the prime contenders.
Advantages of the merger
If Flipkart buys out Snapdeal, their largest investor Tiger Global Management may sell around $1 billion of its shares to Softbank. Tiger Global Management has pumped in around $1 billion into Flipkart in the last eight years and currently holds around 30-33% share.
Partnering with Snapdeal will not guarantee Flipkart a larger base of new users since the two companies do not have mutually exclusive customers and the type of products sold are also not very different. However, Flipkart will benefit from Softbank’s investment arsenal and will gain from Snapdeal’s logistics network and its extensive chain of warehouses.
Snapdeal is keen on the deal as it would end up with a stake with Flipkart who can take the fight to Amazon in India.
Also having India’s largest e-commerce company, the second largest mobile wallet and in addition to that two biggest online fashion brands in India, a used-goods marketplace, logistics companies and even a UPI app will help bring in a strong diverse portfolio.
Cross-pollination opportunities will also be there as Freecharge can become the wallet of choice on all these platforms. This integration can give a huge challenge to Paytm who is the market leader in e-wallets.
Also Snapdeal and Flipkart can integrate their supply chains which means if something is unavailable on Flipkart then it can be still sold if the stock is available with Snapdeal.
For the customer, the good thing is that Flipkart will now be getting the backing of Softbank which could lead to another nine months of discounts. This will help in Flipkart facing Amazon head-on and with the backing of Softbank, Flipkart will have enough cash to fight Amazon for the next fifteen months. The better cash flow for Flipkart may prove crucial, as Alibaba is also keen to get a share of the Indian E-commerce sector as it now stands at $200 billion of GMV.
Challenges for the Merger
Flipkart had last raised funds in 2015 when it had received $700 million at a valuation of $15 billion. Since then the company has faced valuation markdowns by its own investors which has seen a considerable decrease in valuation of the company. Flipkart has already changed its CEO twice in the last 2 years and is currently managed by Kalyan Krishnamurthy. Now this is a concern as Flipkart needs to maintain stability.
Also Softbank has yet to receive the clearance from its co-investors in Snapdeal. This is a major barrier for the merger as the co-investors are reportedly unhappy with the valuation of Snapdeal by Softbank at around $800 million. They are quoting Jasper InfoTech’s other ventures such as Unicommerce and Vulcan Express as potentially profitable. The Co-investors want them to be counted separately. This would lead to Snapdeal’s overall valuation to go up to $1.2 billion. Also it would lead other players like Alibaba to exit the conglomerate.
While there are benefits, the merger is going to be difficult as along with their product portfolios, they will also bring in their losses. This leads up to Rs 10,000 Crore every year, and both the companies will be hoping economies of scale will come into the picture. The operations across divisions can as a result be rationalized and the supply chains can be streamlined. This will reduce their costs. This could help them take a step towards profitability. But regardless of how they fare, if they do come together, they will be not only be the largest Indian e-commerce company but the largest internet company that India will ever see.