Why Snapdeal is important for Flipkart despite its nuisance value?

Snapdeal-Flipkart Merger

In horizontal e-commerce industry in India, rivals need to unite in order to stop the Amazon juggernaut from capturing the entire market.

Let us first look at the strategic imperative playing out in Indian e-commerce market. Amazon is committed to India. It has signalled that it would continue to pump money until it wins in India. Its actions are consistent with that. We know their track record in the US. And looking at how they have executed in India over the last 3 years, it is becoming clearer that everyone else needs to unite. That is the only way to stop the Amazon juggernaut.

The biggest player in the non-Amazon camp is Flipkart. And therefore, it is no surprise that smaller and economically unviable e-commerce start-ups are merging into it, from Myntra to Jabong to eBay and now Snapdeal is in discussion.

Investors are pushing for the Snapdeal-Flipkart merger, because they see the strategic need. From Snapdeal’s investors’ perspective, in a consolidating Indian e-commerce scenario, Snapdeal stands no chance. It is neither #1, nor #2. It’s brand perception is not that great. It does not command loyalty from its customers and sellers, the two most critical components for winning. Winding up a company and liquidating its asset is legally cumbersome in India. Merging it with Flipkart is a significantly better option, which also gives them a share in the combined entity in a stock deal. This is the best hope for Softbank, the biggest investor in Snapdeal, which invested close to a billion at the peak valuation of $6.5 billion.

Why not offer Snapdeal to Amazon? I am sure Snapdeal investor’s would love to. But I do not think Amazon needs Snapdeal to win. In addition, there would be too much distraction and cultural issues in assimilating Snapdeal. Amazon has a well-defined playbook and they are executing it in a cold-blooded fashion.

From Flipkart’s investors’ perspective also, a merger makes sense. In a three-way fight between Amazon, Flipkart and Snapdeal, it is evident that Amazon stands to gain the most. Flipkart’s investors, particularly Tiger Global, would want Snapdeal to go away. And the best way to do that would be to embrace it and kill. In addition, for Flipkart, having a deep-pocketed investor like Softbank will be useful in its fight against Amazon. It could also open strategic options with Alibaba down the road.

So investors from both the camp want the deal to happen. The issue right now is what is the right price. Snapdeal had previously raised money at $6.5 billion valuation. But Flipkart investors are not keen to pay above a billion, because they know Snapdeal is on fire sale. Purely from a business standpoint, Snapdeal assets are not valuable to Flipkart. The only value it represents is nuisance value. Acquiring it makes sense to prevent it from doing further harm in Flipkart’s fight against Amazon.

At this point, some good negotiation is going on. Those Snapdeal investors who invested at a very high valuation and fear wipe-out are holding out. They need to be brought on board by other investors. So internally among Snapdeal investors some concessions will be made in favour of another set of investors to get them to say yes. On the other hand, Flipkart investors, who have an upper hand at this point, do not want to budge. They will improve the offer but not much. A billion is a psychologically important price point. Snapdeal investors would want a number above that to claim a respectable exit. On the other hand, Flipkart investors would want to close at a number significantly lower than that. Their last bid was reported to be of $550 million, which was rejected by the Snapdeal board. This was a low-ball offer similar to how traditional negotiation happens in the offline retail outlet. I think they will improve the offer and the deal will close at a price point tad lower than a billion. It is ironic how the two largest online players are resorting to a typical offline shopping negotiation. :-)