How Snapdeal and Flipkart acquisition makes sense for Indian companies?

OH!!!, "East is East", and "West is West", and never the twain shall meet, sang Rudyard Kipling.

Amazon started China and India operations in 2004 & 2013 respectively. In 2014, China emerged as the world’s largest e-commerce market but Amazon lost that market to Alibaba. Hence, it became important for Amazon to establish a large India business. Grabbing market shares from Flipkart & Snapdeal, which started operations in 2007 & 2010 respectively, became part of Amazon’s strategy.  

In 2015, Alibaba entered India with 40% stake in PayTM and 2.93% stake in Snapdeal. In 2016, India was recognized as one of the potentially large e-commerce markets in the world. After its investment in Snapdeal became futile, Alibaba started its own Mumbai office. In retaliation, Amazon declared an additional US$ 3B war chest for the India battle. Amazon’s investment in India came at the most opportune moment; both Flipkart and Snapdeal were struggling: working capital & funding crunches, high attrition, top level exits, market share erosion, blacklisted on campuses amongst others.  

After a long time India has a stable, strong,  politically popular & growth oriented Government that has been successful in pushing key reforms (FDI liberalization in key sectors, GST etc.). Moody’s latest report (May 2017) has projected India’s economy to grow at 7.5% in 2017-18 and 7.7% in 2018-19 despite the adverse demonetization impact - ahead of China (6.5%) and the developed world. India’s household incomes are expected to increase consumer spending to US$ 3.6 trillion by 2020 and online sales in India are projected to reach US$ 48B by 2020 & US$ 64B by 2021.

Snapdeal has been losing relevance with time - consumers mostly choosing Amazon or Flipkart.

Amazon has EDGE. It has committed US$ 5B for the Indian e-commerce venture. Funding opportunity has shrunk for both Flipkart & Snapdeal as investors are focusing more on profitability and rationalization of expenses. On contrary, Flipkart & Snapdeal could only raise US$ 4.55B & US$ 1.76 respectively. With its global experience in e-commerce, Amazon is giving intense competition to local players. So, Consolidation of Flipkart and Snapdeal to fight Amazon makes logical sense. 

Synergy: With the Snapdeal acquisition, Flipkart gets increased market share (i.e. more than Amazon). It also gets backing from Softbank, it being a majority shareholder in Snapdeal (Softbank is also likely to invest $1.5B in Flipkart). The combined entity gets logistical and operational advantages (access to warehouses, sellers & new segments) & cost optimization by cutting redundancies. With Snapdeal out of picture, sellers would be forced to toe the line with Flipkart & Amazon. Lastly, Flipkart gets competitive insights from Jack Ma, Alibaba, Softbank & eBay (common investor to Flipkart & Snapdeal). 

Till recently, Softbank had 32% stake in Alibaba. The combination of Alibaba, Jack Ma & Softbank that initially defeated eBay in China and then successfully fended off Amazon has once again teamed up against the arch rival –“Amazon” but on the Indian turf. Interestingly, Jack Ma is also on Softbank’s board. To prepare itself for the India battle, Softbank has accelerated its game by buying stakes across several related companies: Snapdeal, PayTM & Grofers (Reports suggest that Softbank’s next potential target could be Bigbasket). Softbank has also launched a mega $100 Billion technology focused fund to target future acquisitions. This fund is SoftBank’s growth engine for the next 300 years. With its ability to outbid any other investor, Softbank is going to give a hard time to Amazon. Softbank’s prominent stakes around this deal: 

This is a global ecommerce war and India just happens to be the battleground. Eventually only 2 players would exist: (Flipkart + Snapdeal) Vs. Amazon. With Alibaba in India, it most likely would join (Flipkart + Snapdeal) entity to take Amazon head-on. In the end, the game on the Indian turf would be between The East & The West:

•       East Team Comprising: Softbank, Alibaba, Jack Ma, eBay, Yahoo, Foxconn, Microsoft, (Snapdeal+ Flipkart+PayTM+Freecharge) entity. This combined entity would eventually be fully controlled by Alibaba.

•       West Team Comprising: Amazon

The team with more “Customer Centric Approach” would eventually win a bigger pie of the Indian market. Success Mantra for Flipkart & Snapdeal entity should be “To Evolve from Reactive Engagement to Proactive Engagement”.

It is an opportune moment for Indian entrepreneurial ventures to get aligned and leverage from the resources & synergy of the combined entity. It is also worth learning Alibaba’s successful business models. Besides, Alibaba provides valuable employee engagement lessons. One popular policy that distinctively stands out is the interest free loan for employees’ home down payment. Is that not worthy emulating? 

For any alliance to work: each partner must be a fit to “The 7C Rule”. 

With so many stakeholders – only time will tell if the alliance chemistry really works in the long haul.

2. Integration would be a challenge. For instance: both partners bring almost the same set of sellers; establishing relationship & dictating terms with them for better margin could be difficult.

3. Matching Amazon’s infatuation for Customer Service – could be a Cultural Shift for the Indian players but this could eventually be the GAME CHANGER for the combined entity.

Acquisition of Snapdeal by Flipkart is a signal of the changing dynamics in the Indian & global e-Commerce space. Consolidation is bound to happen with only 2 players eventually existing: The East Team controlled by Alibaba and The West team comprising Amazon. The combined East entity would be backed by Softbank, eBay & Microsoft. Both Amazon & Alibaba, given their strong Free Cash Flows (FCF) would give each other an equally tough fight. (FCF is the cash a firm produces through its operations after accounting for all the expenses on its assets).

However, managing the East Alliance would be a challenge. The “The 7C Rule” would determine whether the alliance would ultimately succeed or fail. Trust would be the ingredient for the eventual cohesion & success of the alliance. The alliance managers must continuously assess “The 7C Test” for each its members to understand whether someone’s allegiance to the alliance is really making sense (i.e. Cost Benefit Analysis). Lastly, the penchant to service customers that both Alibaba & Amazon displays need to percolate to all the alliance members. 

On a lighter note, compared to Alibaba’s, both Amazon & Flipkart brands have huge competitive disadvantage; have we all not grown up hearing stories about “Alibaba & 40 Thieves” and is “The Alibaba Brand” not deeply entrenched in our minds? 

Finally, this is like “The Mahabharata” but it would be a bit early to say whether Softbank is really acting as the Lord Krishna in this warfare between the 2 kings of commerce (J & J – Jack Ma & Jeff Bezos), both of whom were co-incidentally born in 1964.