Just ask Ola, Flipkart and Myntra.
On Wednesday, cab-hailing service Ola (ANI Technologies Pvt. Ltd) moved to close TaxiForSure (TFS), nearly 18 months after buying it for $200 million, which is the third largest buyout in the Indian consumer Internet history, behind Snapdeal’s acquisition of FreeCharge for $400 million in April 2015 and Flipkart’s acquisition of Myntra for $330 million in May 2014.
Ola’s decision to buy (and now shut TFS) is regarded as a masterstroke by analysts and investors. By buying TFS (mostly in stock), Ola got rid of an annoying rival and became the only new-age Indian cab-hailing company investors could put money in. TFS also helped Ola extend its lead over Uber and focus all its energies on fending off its American rival rather than fighting on two fronts. Within six months of the TFS deal, Ola’s valuation soared more than five times to $5 billion when it raised $500 million from SoftBank, Tiger Global Management, DST Global and others.
To be sure, the two other large acquisitions in consumer Internet—apart from Ola-TFS—have been successful for buyers from a business point of view, too. Flipkart’s acquisition of Myntra helped it build a dominant position in online fashion (Flipkart also bought Jabong, another online fashion retailer, last month to extend its dominance). Snapdeal’s acquisition of Freecharge provided a valuable payments arm to the marketplace.
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“From the start, the whole intent behind buying TFS was to kill it. Once TFS was out of the picture, any investors who wanted to play in the cabs sector would necessarily have to invest in Ola. And that’s played out really well for us. Rather than fighting two competitors and burning more money, we are fighting just one (Uber)," an Ola investor said on condition of anonymity.
Apart from Ola-TFS, there are plenty of instances where start-ups have closed acquired companies. A majority of these deals and other mergers and acquisitions (M&As) in consumer Internet are driven by investors.
Among the so-called unicorns, or start-ups valued at more than $1 billion, Flipkart Ltd, its wholly-owned subsidiary Myntra Designs Pvt. Ltd and Snapdeal (Jasper Infotech Pvt. Ltd) have acquired smaller rivals, driven by investors’ urge to focus on consolidated portfolios or by a need to complement their existing offerings.
Flipkart acquired electronics retailer Letsbuy in February 2012 and downed shutters on it three months later. Myntra acquired private-label brand Exclusively and its subsidiary, a private-label sports apparel brand, Sher Singh, in November 2012. Snapdeal bought sports and fitness equipment etailer eSportsBuy in January 2012 and killed the brand two months later.
While the Sher Singh label was killed, Myntra sold Exclusively back to its founders Sunjay Guleria and Mohini Boparai Guleria in June 2013.
Snapdeal then bought Exclusively in February 2015 in an attempt to expand its premium apparel business. But the move tanked as Exclusively failed to make a dent in the market share of Flipkart, Myntra and Jabong, which dominate online fashion sales.
Mint reported on Wednesday that Snapdeal will shut down Exclusively and merge the platform with its own fashion category.
Most of these deals benefited the buyers and their investors, which had driven the mergers in the first place.
Still, such strategies may not always work.
The jury is out on Quikr’s $110-120 million buyout in January of real estate site CommonFloor and the merger of Roadrunnr and TinyOwl.
In June, common investors Sequoia Capital and Nexus Venture Partners pushed delivery start-up Roadrunnr (Carthero Technologies Pvt. Ltd) to acquire food delivery start-up Tinyowl Technology Pvt. Ltd in order to try and salvage their investments.
After the deal, a new food delivery entity called Runnr was created while Tinyowl closed down.
“Founders often underestimate the effort required to integrate two organizations after an M&A. A large scale organization has systems and processes in place and their goal of M&A is to diversify. Start-ups themselves are going through a flux. What most founders feel is that they need to scale faster. Hence, they go for an acquisition to grow faster by acquiring some company in an allied vertical or to on-board acquire talent quick and fast," said Rutvik Doshi, director at Inventus (India) Advisors.
“A lot of effort goes into aligning aspirations of two different companies, working style and culture and then products, which is often overlooked, consequently leading to fallouts," he added.