Snapdeal-Flipkart merger: Who will win?
My thoughts on the potential Snapdeal-Flipkart merger developments
Snapdeal and its woes seems to be the hot topic of discussion these days. No wonder my ET Retail news feed today had 4-5 articles dedicated to this. Everyone is talking about and trying to give an opinion on the fate of this poster-boy of Indian e-commerce. Will SoftBank pump in more money, will it be sold to rival Flipkart or Paytm, what valuation etc. are the burning questions that people, at least in the startup world, are debating about.
Apparently there have been board room battles over Snapdeal’s valuation. Snapdeal has a seven member board - SoftBank has two seats at the table, Kalaari Capital and Nexus Venture Partners hold one each, and the other three are held by Kunal Bahl, Rohit Bansal and Akhil Gupta of Bharti Enterprises. According to various news articles, SoftBank had wanted to invest money in Snapdeal at a much lower valuation viz. a viz. its peak of $6.5B. This would have increased SoftBank’s stake but diluted Kalaari-NVP duo’s shareholding significantly. Obviously, no investor in their sane minds would want to be ousted without making the potential/desired returns. While Kalaari has had some success with its investment in Snapdeal when it sold part of its stake in 2014, NVP has not yet made any exit. And hence, during this downturn, both these investors allegedly want Softbank to also buy at least part of their stake instead of just diluting it down drastically.
However, the above is only a part of the board room story. The 2 vs 2. The “masala” maybe. But what is nowhere to be read about or (let me put this in a different way) what the “unnamed insiders” have not told the media yet is about the views of the other 3 directors. I am sure Kunal, Rohit and Akhil would have voiced their opinion on these matters as well, right Mr./Ms. Insider? As co-founders, are Kunal and Rohit happy to dilute their stakes further (currently at 6.5% according to the news) or do they want to make some more money for themselves by further selling part of their stake? As CEO and COO, are they open to let the value of their company drop to get the requisite funding to sustain the business or do they see a merger with rivals Flipkart or Paytm as the best strategy? What is Akhil Gupta's view on this as an independent director? Interestingly, these are some questions that remain unanswered.
Nonetheless, it seems that the Flipkart-Snapdeal deal might just happen, paving the way for a “FlipDeal or SnapKart” – something many (at least at Snapdeal) used to jeer at till a year ago. This is expected to be the largest transaction in the Indian e-commerce industry followed by Snapdeal’s acquisition of Freecharge at over $400 million and Flipkart’s acquisition of Myntra at $300 million. On a different note, our Indian e-commerce industry seems to be setting a trend for doing the “largest” transactions every second year. Anyway, according to the deal contours published in the media, SoftBank will shed close to $1.5B for a 20% stake in Flipkart of which $500 million to $1 billion will go directly to Tiger Global. Tiger is reported to have invested around $1B in Flipkart in different rounds for a 30-33% stake.
On this front Kalyan Krishnamurthy, the new Flipkart CEO appointed by Tiger, appears to have played a canny game. Flipkart in its latest funding round was planning to raise close to $1.5B from investors such as eBay Inc., Microsoft Corp, Tencent Holdings Ltd and PayPal Holdings Inc. In a smart move I would say, Flipkart convinced eBay Inc. to invest in the company and bought eBay’s business in India. It is quite possible that the money only got circulated back to eBay Inc. It got rid of its dying business in India and a stake in Flipkart. Smooth. But it also helped Flipkart in fixing its valuation at $10-$12B when many existing investors such as Morgan Stanley, Vanguard Funds and Fidelity were on a devaluing spree till December last year. Now with the Snapdeal deal and with SoftBank shelling out a huge amount to Tiger, at least this CEO is on track towards achieving his goal, that is to recover Tiger’s investment in the Flipkart. But will it be a value accretive acquisition for Flipkart? Only time will tell.
And what about SoftBank then? It has invested around $2B in India. With one big investment after the other facing challenges, will its $1-$1.5 billion bet on Flipkart pay? Or will it be the last investor standing? Last I read, both Snapdeal and Flipkart made losses amounting to similar values. And with stalled growth rates across the industry, if SoftBank lost confidence in Snapdeal, what different business model does it see in Flipkart? I am sure there are highly qualified people working with SoftBank’s investment team who would ensure that this is not a case of putting good money after bad. And I hope that SoftBank and/or the various other investors are not just trying to make sure that "What Is Dead May Never Die". On that note, it was funny to read what Sandeep Singhal of Nexus Venture Partners had said - "Effectively what we (venture capital investors) did is collectively spend $2-3 billion on educating the Indian consumer on how to use Amazon…."
Nevertheless, the current state of the e-commerce sector, the dynamics and its evolution is quite fascinating to observe. How will Amazon and Alibaba respond to this is another story. For now, the drums are rolling. Who survives and who retires, will soon come to light. Till then, let’s just wait and watch.