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Deals with eBay, Snapdeal reflect Flipkart's desperation to counter Amazon

Rajeev Dubey     April 11, 2017

Sheer desperation of a likely loser, and the anxiety of enormous cash burn, have driven Flipkart into two incredibly bad merger and acquisition (M&A) deals: Monday's announcement of acquisition of eBay India as part of a $1.4 billion funding round from Tencent Holdings, Microsoft and eBay, and the ongoing discussion with Snapdeal for a probable acquisition/merger.

The twin acquisitions may be able to help Flipkart retain its No.1 status among Indian e-tailers. But, only just. At best, it is a temporary reprieve in the face of a marauding rival like Amazon that has been nipping at Flipkart's heels and has already taken the mindshare (if not market share) in this bitter rivalry. Amazon has consistently outwitted, outsmarted and outmanoeuvred every other e-tailer in the domestic market through some genuine groundwork in seller and buyer acquisition via customer centricity.

Companies typically acquire or merge with rivals for a few common reasons, very few of which apply to the Flipkart-eBay deal and the Flipkart-Snapdeal discussion.

Acquire a brand! Flipkart's previous acquisitions of Myntra and Jabong seemed logical because they allowed the company to get into fashion retail in a big way - a great weakness since its inception. But acquiring horizontal players eBay India and Snapdeal does not bring that advantage to the table because in horizontal retail (where the e-tailer sells products across several categories), Flipkart is already a far stronger brand than both these companies. Typically, post-merger, the weaker brands become unsustainable and have to be shut down due to the enormous cost of maintaining such brands independently.

Acquire a customer base! Flipkart's own customer base is already substantially larger - more than double of Snapdeal's and several multiples of eBay India's. Acquiring them doesn't provide Flipkart with an exclusive customer base because in all likelihood, any eBay or Snapdeal customer is already a Flipkart shopper. There are, after all, barely 60-odd million online shoppers in India.

Acquire a business! Just like Flipkart, which is burning $40-50 million every month, both eBay and Snapdeal are broken businesses. Snapdeal's parent Jasper Infotech reported a net loss of Rs 2,960 crore in 2015-16 on a top line of Rs 1,456 crore (losing Rs 2 for every Re 1 of sales) while eBay lost Rs 172 crore on sales of Rs 132 crore in 2014-15, as per its last financial report to the registrar of companies. It is not clear yet how much of eBay's and Snapdeal's accumulated losses Flipkart will have to absorb. But it will be naive to believe that all of the $1.4 billion will fall into its kitty.

Tragically, although eBay was the earliest to spot the India opportunity, it lost the plot in Indian e-tail long ago. It neither had the promptness of Flipkart, nor the customer focus of Amazon. Besides, it never believed in the speed of product delivery to customers. As Flipkart and others gained ground, eBay was relegated to a peripheral e-tailer.

Interestingly, neither Snapdeal nor eBay has anything to offer that Flipkart already doesn't have. It is not surprising then that the deals are largely driven by investors who are putting together two weak entities in the hope that they will be stronger as a consolidated entity. While Flipkart had targeted halving its monthly burn to just $20 million, post-merger the burn rate is likely to increase rather than reduce. Remember, Snapdeal is also burning $40-50 million a month while in 2014-15, eBay lost nearly $25 million, which is likely to have accelerated in 2015-16 (whose financials eBay has not yet submitted to the RoC).

There is so little to gain and so much to lose for Flipkart that it is almost unbelievable that it is in discussion to acquire Snapdeal. For the moment, it appears to be a desperate attempt at keeping its nose ahead in 'market share', come what may.

Eliminate rivals! The biggest advantage of such M&As is that they eliminate competition and the acquirer can then hope for a free run in the marketplace. That, however, is not the case here. Not only will Flipkart have to deal with cannibalisation of businesses post-merger, but Amazon will also continue to be a formidable rival. Last year, it lost Rs 3,572 crore on revenue of Rs 2,217 crore, indicating it will continue to bleed itself and its rivals through some deep pockets in the fight for a piece of India's fast-growing e-tail pie. Also, another emerging rival Alibaba (Tencent's biggest rival in China) has already done the groundwork in the Indian market via Noida-based Paytm. Not to forget that is also likely to gain at the expense of any cannibalisation of the Flipkart-eBay-Snapdeal combine.



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