Flipkart buying Snapdeal! Logic behind the mega acquisition

With most of the e-commerce players running into losses, its time for the industry to churn out some numbers for the investors and prove that their net worth is not just a number but their real value. For those who can not bring cheer to the investors are set to perish in an over estimated Indian e-commerce market. Few players have already shut shop. PepperTap is one example and its time to witness some further consolidation in the industry with Flipkart buying Snapdeal.

Once among the top 3 e-commerce player of India, Snapdeal, is having a tough time to impress its investors and especially Softbank, its biggest stakeholder. The company which was couple of years ago valued at $6.5 bn is today struggling to prove even one sixth of its valuation. In a latest development, sources state, that Flipkart is buying Snapdeal operations to take on rival Amazon in India.

Why is Flipkart buying Snapdeal?

However, the question arises, why will Flipkart be interested in a venture which has been making losses? Why will a company spend heavily to nurture two brands especially after the failed effort of Snapdeal’s biggest campaign – Unbox Zindagi. If we take a closer look at both the companies we find stark difference which actually complement each other to take on the bigger rival – Amazon. Below are few points which might have excited Flipkart to take over Snapdeal:

1. Flipkart is holding around $50-60 mn in its kitty in addition to the recent funding of Rs 1.5 bn (Flipkart set to raise up to $1.5 billion amid talks to buy Snapdeal) With Flipkart buying Snapdeal, they not only eradicate one competition but also put their cash to good use.
2. Flipkart is particularly strong in the the Western and Southern part of India in terms of reach and logistics where as on the other hand North and East India have been a focus market for Snapdeal. To take on a giant like Amazon, Snapdeal acquisition will give Flipkart a uniform Pan India presence.
3. Unlike Flipkart, Snapdeal has unparalleled reach to tier II and tier III cities supported by a robust logistics arm.
4. Vulcan Express, Snapdeal’s fully-owned logistics arm that not only functions as the primary delivery mechanism between sellers and customers and vice-versa for the marketplace but has an external client list as well, would most likely be part of the merger.
5. Snapdeal’s Vulcan Express is about the reach profitability numbers compared to Flipkart’s e-kart which posted a loss of Rs 810 cr. The logistics of the e-commerce giant will certainly pump up.
6. Snapdeal currently has 300,000 sellers compared to Flipkart’s 100,000 sellers. Additionally a majority of these Snapdeal sellers are in the sale in the unorganised sector where as Flipkart has always been more skewed towards the organised sector.
7. Last but not the least, Flipkart will get Softbank on board as a stakeholder and chances of further funding coming from Softbank can not be ruled out.

One thing is clear for sure, that the fortune of companies have moved from their founders to the stakeholders (Snapdeal’s co-founders hint firm’s fate not in their hands) and its now time that the investors take charge and aim at getting the right ROI.

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