AXIS-ing the FreeCharge over E-commerce industry

“There is a bit of evidence that a merger would bring economies of scale, but it’s hard to say just who would benefit from those.”

– Mark V. Pauly

Introduction

Axis Bank recently acquired FreeCharge, a digital payment platform owned by struggling e-commerce marketplace Snapdeal for ₹385 crore in an all cash deal that came as a shocker for the industry. FreeCharge, which was the second largest mobile payment interface until last year, was sold to Axis Bank for almost one-seventh ($60 million) of the price it was acquired for by Snapdeal ($400 million) in 2015. But according to reports, other bidders were offering a way lower price than what it is sold for.

Axis Bank told BSE on 26th July 2017, “The bank has gone into an offer  with Jasper Infotech Pvt Ltd (Snapdeal) to gain 100 percent value capital of Accelyst Solutions Pvt Ltd and Freecharge Payment Technologies Pvt Ltd.”

Why acquire a loss making company?

Many people scrutinized the reason for this acquisition as Axis Bank has had a huge digital presence but does not have the capacity to construct its own platform. Moreover, the bank, in 2015,  had already incorporated a portable wallet LIME, which offered Unified Payment Interface (UPI) instalments through Axis Pay to manage and transact money through a single mobile app. However, it didn’t work out well.

Irrespective of the present digital transaction platforms, the move to acquire Freecharge gives Axis bank various strategic advantages:

  • Expansion in customer base – It gives Axis Bank an access to FreeCharge’s 54-million-plus customers (almost doubling their customer base), technology, and the branding advantage that comes as an early mover. The investment required to build a customer base and acquire technology is huge, thus would save costs significantly.
  • Cross-selling opportunities – Unlike many bank clients, FreeCharge customers are digitally advance and hence, if the bank is able to use this to their own advantage, it will have abundant chances to cross-sell products.
  • Employee acquisition – With the acquisition of a company one also procures its human resource capital and retains its experienced and skilled employees. This would again save the cost of hiring new employees and spending on their training.  To ensure the smooth integration of FreeCharge with Axis Bank, employees of FreeCharge are being given a six-month retention bonus, according to people aware of the recent developments within the companies.

Axis Bank CEO Shikha Sharma said the FreeCharge acquisition aims at marrying the ability of a fin-tech company with the strength of a bank to provide a “uniquely distinctive” user experience.

Why sell at a huge markdown price?

Snapdeal had its peak valuation in 2016 at about $6.5 billion which has now come down to about $1 billion. Snapdeal’s market share fell from 12% in June 2016 to 5% in April 2017.

In 2015, Snapdeal bought FreeCharge for exorbitant Rs. 2400 crores. This deal was touted as one of the largest in Indian digital space which helped Snapdeal to penetrate into M-commerce market. It seemed the perfect acquisition as 60% of the payments were done through the mobile app.

In 2015-16, the revenue of Snapdeal plummeted while its losses more than doubled to Rs. 3,316 crore. Last year, there was an exodus of employees who were laid off from a workforce of 9000 reducing the employee base to only 1200. The company is going through a major cash crunch. Thus this decision of selling FreeCharge, which was adding more to the misery, was inevitable.

“This is a win-win deal that allows Snapdeal to further focus on our core e-commerce business while giving Axis Bank some of the agilest and innovative capabilities in the financial services space in the country,” said Kunal Bahl, Snapdeal co-founder and chief executive.

A downturn for Snapdeal came when the deal with Flipkart was put off. Flipkart being the superior brand would have given them superior technology, stronger brand name, a new set of customers and suppliers. The money from the sale of FreeCharge will give Snapdeal some breathing space to re-evaluate deals but would not end all miseries.

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How would Axis Bank Benefit?

There were several bidders for Freecharge including mobile wallet competitors such as Paytm and MobiKwik. Some reports claimed that PayPal was also looking to acquire the company. Even Flipkart was in the bid for FreeCharge in order to bolster its digital payments arm.

Axis Bank along with FreeCharge also acquired Accelyst, under Snapdeal, which provides bill payment, coupon services, online recharge, a marketing platform for third parties, distribution of mutual funds and insurance products through the mobile app, website and mobile site. Axis Bank has been pushing for its online payments and banking services, this deal would give the bank access to high-quality technology that traditional companies struggle to build.

Currently, The Axis Pay UPI app has 1-5 million installs, while Freecharge has much more at 10-50 million installs on it. With this deal, it is clearly visible that the banks are looking to acquire more digital wallet companies in the near future in order to perform better in the digital payments world.

Conclusion

Some may question this acquisition but according to experts, given the rapid change in the mobile wallet space and the range of product offerings to a customer, it is prudent to strategize on customer acquisition rather than spend time in building a platform.

The acquisition shows that the bank is keen on an aggressive expansion in the digital payments space. There is always a choice between build and buy. If you think that space is evolving too fast, you may opt for acquisition. That also gives you an edge in acquiring onboard customers.

India is still lagging behind in the mobile and digital payments space. Banks are limited by their own complex structure and various regulation and not able to focus on technological advancements. It makes sense to integrate with start-ups in the fin-tech space or acquire them. We will see more of this trend in the future.

References

  1. http://www.business-standard.com/article/companies/freecharge-sold-to-axis-for-60-million-117072601695_1.html
  2. http://www.livemint.com/Companies/8cZBSyVgBrYpGMKf68dp1M/Axis-Bank-acquires-Freecharge-for-Rs385-crore.html
  3. http://www.firstpost.com/business/axis-bank-buys-freecharge-for-rs-385-cr-its-the-right-price-but-sharp-valuation-fall-a-wake-up-call-for-startups-3861541.html
  4. http://economictimes.indiatimes.com/small-biz/startups/snapdeal-undergoing-major-layoff-to-slash-80-percent-workforce/articleshow/59845950.cms
  5. https://www.vccircle.com/the-rapid-rise-and-the-stunning-decline-in-freecharges-fortunes/
  6. https://www.ft.com/content/5a1b08ae-6161-11e7-91a7-502f7ee26895
  7. http://www.zeebiz.com/companies/news-heres-how-freecharge-acquisition-will-bolster-axis-banks-digital-arm-19785

 

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