Is the Flipkart-Snapdeal deal the best way to revive the flag-bearers of the Indian e-commerce industry?

Flipkart, India’s largest online retailer, has been on an onset of a flurry of deals, trying to counter the global tech giant Amazon. Post acquisitions of China’s Tencent, eBay India and Microsoft’s exclusive public cloud platform, Azure, in a Rs 9,000-crore ($1.4-billion) deal, Flipkart has set stage for a merger with Snapdeal, that is yet to be finalised in the coming weeks. A potential Flipkart-Snapdeal merger/acquisition is an attempt to help Flipkart reach the No.1 status among Indian e-tailers.

Having had a history of making prolific acquisitions of rivals such as Myntra, Jabong and now eBay, its eye is on another Indian tech company in order to disrupt the traditional market.  The success of this deal  will mark the biggest acquisition in Indian e-commerce and reshape India’s online retail landscape. Flipkart, has roped in Goldman Sachs as an advisor to this proposed deal along with Credit Suisse, which has been mandated by Snapdeal, in order to come up with the final terms and conditions for this transaction.

Why Snapdeal?

A major reason for this proposed deal between these two Indian e-commerce giants, is to attract SoftBank, the largest stakeholder in the online marketplace, which will possibly invest up to $1.5 billion in Flipkart post this deal. It will definitely prove to be a landmark deal for Flipkart leading to transformation of India’s ecommerce landscape.

As stated by Rutvik Doshi, director at the India arm of Inventus Capital Partners, “A Snapdeal acquisition helps consolidate the ecommerce market and get SoftBank as an investor.” Flipkart has made records by making acquisitions and increasing its competitors in the global markets. To begin with, Tencent versus Alibaba, Microsoft against Amazon Web Services and now eBay versus Amazon.

India’s online sellers have been bleeding due to huge marketing expenses and aggressive discounts. Neither Flipkart nor Snapdeal have ever registered profits, even though they were founded almost a decade ago. At present, these e-commerce retail giants,  who are actually the biggest names in the Indian market, face a fund crunch due to huge marketing expenses and aggressive discounts. In  almost a decade, they have done a phenomenal job of bringing a conservative Indian customer to shop online. But, in this process of shaping the online presence of Indians in the e-commerce sector, they have barely been able to make profits and hence, questioned by investors.

A merger between these two might be a win-win situation for both the Indian retailers because it can help cool down the marketing frenzy and contribute to a lot of other factors such as:

  • Market Share – India has become a hub for online retail and offers massive opportunity. As suggested by reports, its current valuation of Rs 1.44 lakh crore is still nascent and is expected to grow over 40% each year.  A report by the Boston Consulting Group and The Indus Entrepreneurs states, that by 2020, with increase in usage of some 550 million Indian cellphone users and high-speed mobile internet, the size of our internet economy (including online retail) will probably double to $250 billion.
  • Funding – The funding crunch has been a major problem for these retail giants. But in the previous year, Flipkart has managed to fetch $1.4 billion in a single round. With the onset of this deal, the cash crunch of Snapdeal could be compensated by the finances of Flipkart.
  • Popularity – With Jabong and Myntra, being part of Flipkart, it has been more popular than Snapdeal among Indian mobile-only customers. A consolidation of these two, might create an Indian e-commerce giant that could give tough competition to the top selling app, Amazon (The Economic Times, 2017). 

The main question that strikes me here is that, What should be the basis of a successful merger : Operational synergies between the two companies or consolidation of investor interests?

It is essential for Flipkart to strike the right deal after its latest round of funding.  Post-merger, the strategic investor SoftBank, will become a significant shareholder in India’s largest e-commerce company by making an investment of up to $1.5 billion.

It is expected that SoftBank will not only  infuse fresh funds into the company, but also buy shares from Flipkart’s largest shareholder, Tiger Global, the New York-based investor.

In order to help revive Snapdeal and its 3,000 employees, this deal is one of the best options for Snapdeal. With an intention to create a strong market position in India and compete with the international e-tailer Amazon, this deal is likely to be a strong proposition for Flipkart as well. Snapdeal enjoys a strong online presence in the north, hence this deal could add a 100 million users to Flipkart’s customer bank. It will also get access to Snapdeal’s small and big warehouses, especially in Northern India. Snapdeal also has exclusive partnerships with global brands which will be an added advantage for Flipkart in diversifying its fashion portfolio. Hence, this merger is likely to strengthen the supply chain of Flipkart and build its financial muscle in India (Businesstoday.in, 2017). 

I believe, a merger between these two is a logical strategy for both the companies to take on the international rival Amazon. I think the focus here should be to consolidate and attract strong investments and maintain a strong presence in the Indian e-commerce sector rather than the short-term goal of making immediate profits.

 

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SBI merger: Boon or Bane for India?

State Bank of India, India’s largest lender joined the global league of top 50 banks with the announcement of a merger of the PSU banks of SBI from April 1,2017. The deal comprises of five associate banks,  State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore and the Bharatiya Mahila Bank (BMB) combined into one entity within the next quarter. Post-merger, the bank will function as a unified entity with a deposit base of more than Rs 26 lakh crore and advances of Rs 18.50 lakh crore.

With an intention to expand the provision of services across the country, Arundhati Bhattacharya has been talking about the benefits of this huge merger. She said, “The combined entity will enhance the productivity, mitigate geographical risks, increase operational efficiency and drive synergies across multiple dimensions while ensuring increased levels of customer delight.”

This deal has its pros and cons and will massively impact the banking sector in India. The asset base of the bank is expected to expand to Rs. 37 trillion (Rs. 37 lakh crore) with 22,500 branches and 58,000 ATMs across the country. It will become the largest Indian bank with over 50 crore customers (The Economic Times, 2017).

What is the problem this proposed merger is purporting to solve?

The main intention behind this deal proposition is enhancement of the capital base and the rationalisation of the bank. Post this deal, 1,500 branches will be shut because of duplication and will be rationalised. I think this will definitely lead to better utilisation of resources and substantial cost saving.

Further,  the integration of resources of the associate banks with SBI will help in cost saving and drive synergies across multiple dimensions.

As stated by Arundhati Bhattacharya, the major benefits of the deal will definitely be felt by the borrowers. The parent SBI plans to lower interest rates on home, car and personal loans to thousands of customers migrating from the associate banks and also make other additional provisions for them.

Is this merger mania a well thought out solution to the banks’ problems?

However, this mega-deal brings a lot of unexpected jitters in the structure of the bank, especially for the employees of SBI.

  • The deal is expected to have integration of over 70,000 employees having an immediate negative impact on the pension liability provisions of these employees due to varied employee benefit structures.  
  • The promotion prospects of the employees could be hampered due to overlapping of the branches.
  • Relocation of existing employees due to rationalisation of branches can possibly lead to disturbances for the workforce.
  • The deal does not take into account the effect on the stakeholders of the bank, hence driving fears of staff retrenchments and fewer career progression opportunities for the employees.
  • The unions also fear erosion of their power as an effect of this new merger mania.

But, the main problem with this decision is lack of a well-devised structural plan on behalf of the government. The associate banks have a different footing due to their respective regional flavour and focus.

When it comes to merging public sector undertakings, the Centre does not have a good track record. For example, the merger between Air India and Indian Airlines was not very smooth.

Previously, the government holds a bad record in the merger process of PSUs, Air India and Indian Airlines. The results of this deal haven’t been very fruitful till date. In addition, even internationally, the fate of large global banks has also not been successful during the global financial crisis or emergency situations in the world. But, small banks that focus on niche areas have generally survived the crisis. Therefore, the argument the future of a bank is determined by its size is facile even in a global scenario.

Hence, the question here is that will this deal bring long-term synergy benefits or is just another superficial whim of the government.