Cash Crunch Leads To M&Amp;A In E Retail}

Submitted by: M&A Critique

At a time when start-ups are finding it difficult to secure more funding to run their business, consolidation is increasingly taking place in the online retail space. This year alone, there have been 15 mergers and acquisitions (M&As), double that of last year and if the funding pipeline doesnt show any improvement, the dream run of online retail may come to a naught.

Apart from cash crunch, most of the business models lack differentiation in the way of their working. As their working models are becoming very repetitive, big-ticket funding is drying up and valuations of most the e-commerce companies have taken a hit. This year, 10 companies raised $520 million only, a drastic fall from $2.3 billion raised by 14 e-commerce firms last year. Cautious investors have pruned the size of deals as the average investment ticket size in Series A and Series B levels dropped over 50%.

This trend of M&As will continue and grow in the next few years as big companies are always on the prowl to acquire those companies that complement their offerings or add new segments that could help them with incremental growth. Moreover, given the current tight funding scenario, smaller startups wont be able to raise funds like they did before and are open to the idea of getting acquired.

Buying for customer acquisition, vertical addition, and cost rationalization all in non-cash deal

Big companies in the e-commerce business acquire smaller ones to consolidate their position in the high growth cash-intensive sector. Also, they wish to further boost their capabilities, with the right technology and talent. Flipkart, which has so far raised $3.19 billion, is the most funded company, followed by Snapdeal ($1.76 billion) and Paytm ($950 million). With larger players like Flipkart and Snapdeal on a high after having received record-breaking investments last year, they are looking to add more power to their company through strategic acquisitions. The objective is to expand their portfolio and increase their customer base. In the first major M&A activity in the e-commerce space, Flipkart picked up a stake in the marketplace and auctions startup WeHive Technologies Pvt. Ltd. This acquisition will help Flipkart increase its market dominance by scouting for mobile-focused companies.

However, while e-commerce companies raised lot of money in the past, especially the countrys most valuable one Flipkart, there has been a rapid markdown in the valuation. Mutual Fund Morgan Stanley marked down Flipkarts valuation to $5.58 billion. The US-based firm marked down the value of Flipkart for the fourth time in a year, lowering the value of its shareholding by 38% on a quarter-on-quarter basis. It comes at a time when the Indian e-commerce giant has been struggling to raise funds at a valuation higher than or equal to $15.2 billion. Two other investors too, Valic and Fidelity, who earlier marked up the value of their shares in the company, marked down their shares in Flipkartby 11.3%, and 3.2%, respectivelyfor the quarter ended August.

Snapdeal too made its next big kill when it acquired MartMobi, a Hyderabad-based mobile technology startup for an undisclosed amount. This helped Snapdeal strengthen its mobile platform for merchant partners. Chinese e-commerce giant Alibaba is also looking at acquisition of Indian e-tailers that have a large customer base as well as a robust network of merchants. Snapdeal too has clearly demonstrated this intent by acquiring other companies that can add more to its existing capabilities.

Another top M&A deals of this year is Myntras acquisition of Jabong for $70 million. Firstcry acquired Mahindra Retails BabyOye for $54 million and Titan acquired CaratLane for $53 million. In the last three months, for example, online fashion retailer Voonik acquired four startups, and Craftsvilla, an online store for ethnic products, made three acquisitions. So, in Indias e-commerce industry, it is just not customers who are scouting for deals, even companies are peers are looking for cheap deals to acquire and grow.

Jabong-Myntra M&A deal

The online fashion retailer Jabong was shopping around the idea of a merger and was in talks with several competitors, including Chinas Alibaba Group, Kishore Biyani-led Future Group. Snapdeal and Aditya Birla Group also may make a bid for Jabong. Finally, Myntra acquired Jabong.

The buzz about Jabongs acquisition started two years ago. In 2014, news reports had suggested that Amazon was in talks to acquire the company for $1.2 billion as it looked to counter Flipkarts acquisition of Myntra. The negotiations failed as the two companies could not reach a consensus on Jabongs valuation. Jabong was among the two top online fashion retailers in India competing closely with Myntra. However, over the last two years, the company has lost steam as a source of funding dried up. While Myntra continued to get a massive funding infusion from Flipkart, Jabong could not manage to attract funds to support its business and eventually got acquired.

M&As – growth enable

M&A in the e-commerce sector have been on the rise as it is the only way for gaining competitive advantage. The growing penetration of technology facilitators such as internet connections, broadband, and third-generation (3G) services, laptops, smartphones, and tablets will drive the e-commerce eco-system. Also, to capitalise on the benefits offered by the unique Indian consumer base, e-commerce companies have been innovating with policies traditionally not available in a brick-and-mortar store.

The primary motivation for most mergers is to increase the value of the combined enterprise. Synergistic effects can arise from four sources: For one, operating economies take place from economies of scale in management, marketing, production, or distribution, which help the company to grow. Secondly, financial economies will gain such as lower transactions costs and better coverage by stock market analysts. Thirdly, differential efficiency, which implies that the management of one firm is more efficient and that the weaker firms assets will be more productive after the merger; and lastly, there will be increased market power due to reduced competition.

Industry surveys suggest that e-commerce industry is expected to contribute around 4 percent to the GDP by 2020. In comparison, according to a NASSCOM report, by 2020, the IT-BPO industry is expected to account for 10% of Indias GDP, while the share of telecommunication services in Indias GDP is expected to increase to 15 percent by 2015. With enabling support, the e-commerce industry too can contribute much more to the GDP.

Deals in potential sectors

The Indian cab market is reporting a host of M&A deal as most players are looking a pie in this huge sector given its immense potential. The sector is worth close to Rs 50,000 crore, with only 5% in the organized sector. As the city traffic is increasing every day, the number of customers relying on a taxi for their transportation has also increased significantly. Ola bought TaxiForSure for $200 million in a cash-and-stock deal. TaxiForSure was actively looking out for a big investment to keep up with the cash-rich Ola Cabs and Uber. This acquisition added value both on the supply and demand side, for Ola. Apart from a huge customer base, TaxiForSure added 15,000 cars to Olas fleet of more than 100,000 cars.

Food is another area where in e-commerce which is throwing a lot of opportunities. Countrys online food-ordering platform Foodpanda acquired its biggest rival Just Eat India four months after acquiring Pune-based competitor TastyKhana. After closing the deal for an undisclosed amount, Foodpanda is now present in over 200 cities in India and partners with over 12,000 restaurants.

On their path towards expansion, e-commerce players in India are looking out for potential M&A deals in order to expand their businesses. The consolidation drive in the e-commerce industry follows from the fact that foreign direct investment will not happen much and domestic players to grow the pie and expand their business share on their own.

About the Author: M&A Critique is the only magazine, News published from India which gives M&A News, Mergers and Acquisitions News, Analysis, Restructuring, Takeovers, and JV.Read More on:

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