How Flipkart sealed the deal with Myntra

Bangalore/New Delhi: For Flipkart.com and Myntra.com, merging with each other is all about remaining separate. Flipkart, India’s largest e-commerce firm, announced on Thursday it had bought Myntra, India’s largest online fashion retailer, in the biggest deal ever in India’s Internet space.

The e-commerce business in India is valued at $3.1 billion, excluding travel services and tickets, according to a November report by CLSA.

The long-awaited, cash-and-stock deal is likely to value online fashion retailer Myntra at more than $330 million, one person familiar with the matter said, requesting anonymity.

Following two-month long negotiations that led to Thursday’s announcement, both sets of Bansals—Sachin and Binny at Flipkart and especially Mukesh at Myntra—were clear that for a merger to make sense, Myntra would need to be kept independent.

The lessons of the past two years showed that apparel, unlike books and electronics, is a product category that requires specialization, deeper understanding of fashion, aesthetic presentation and experience, rather than volume-focused approach of Flipkart.

“Mergers are risky and integration can be very dicey,” Myntra’s CEO Mukesh Bansal said in an interview. “So it was very important for me to ensure that we would not be integrating anything. Most of the discussions were to ensure that there is absolute alignment about the management autonomy.”

He got what he wanted.

Flipkart has agreed to keep Myntra (pronounced Mint-rah) as a separate entity that will retain its website and continue to be led by Mukesh Bansal, co-founder Ashutosh Lawania and the rest of the current management team.

For Flipkart, which started selling apparel two years ago, the deal is about gaining size and keeping Amazon India, Snapdeal and others at bay. The company started selling fashion products only two years ago but fell way short of its target to be the No.1 in the category by October 2013.

The deal was stitched together over several meetings in March, mostly held at the coffee shop in the Grand Mercure hotel near Flipkart’s office in the Koramangala area of Bangalore. The two sets of Bansals talked about how the merger could be mutually beneficial.

“The Flipkart team reached out to us and expressed interest in a merger. So we got involved to understand what they have in mind. As we interacted over a month, I could see they seemed very credible and authentic,” Myntra’s Mukesh Bansal said.

They discussed various ways in which he could achieve his goal of generating $3 billion or ₹ 20,000 crore in gross sales by 2020. It was clear he would need $150-$200 million more. If Myntra didn’t merge with Flipkart, it would need to raise possibly more because the market was only going to get more competitive with Amazon carving out aggressive long-term plans for India.

A powerful case

By early April, Mukesh and his senior management team were convinced the best way to secure the future of the brand he had built was to join hands with his cross-town rivals.

“We could’ve have tried to do this alone. But we have key battles ahead. The choice was: we can fight all the four players (Flipkart, Snapdeal, Amazon, Jabong) or we can join hands with the strongest player and collectively fight the two key battles. One is the dominance of the horizontal marketplace and the other is the dominance of the fashion vertical. As I saw it, it made more and more sense to use money to fight the other players together rather than burn money to fight each other. I was really convinced that 1+1 can be four,” Myntra’s Mukesh Bansal said.

He spent April discussing the merger and valuations with other board members, investors such as Accel’s Subrata Mitra, Tiger Global’s Lee Fixel and Kalaari Capital’s Vani Kola.

Bansal wouldn’t give details on the discussions and the valuation but said that there were initially some directors, who opposed the merger and wanted Myntra to continue on its own. “But by that time, considering all that we’d discussed, there was such a powerful case for merger that it didn’t take more than a few conversations to convince anyone. Our board culture has always been such that they give the management autonomy and if most of the management team supports a decision, they usually agree to go ahead with it,” said Bansal.

Myntra board member Sudhir Sethi, chairman and managing director at IDG Ventures India, said the board of directors evaluated other options such as a future initial public offering (IPO), but decided unanimously that there were “big benefits in merging with Flipkart”.

“The fact that there are common investors, the founder teams are comfortable with each other, Myntra would get well-capitalized and also that both the companies are based in Bangalore—all these factors played a role. Myntra will also get access to the large traffic that comes on Flipkart as well as its massive delivery network,” Sethi said.

Achieving success in fashion is critical as apart from offering the juiciest margins, it is also expected to be the largest category in e-commerce over next five years. Buying Myntra, with its strong brand, fashion expertise, experienced management team and deep relationships with apparel manufacturers and retailers, is a straightforward way of ensuring a leadership position for Flipkart.

Nerve-wracking crunch

The case wasn’t as straightforward for Myntra and Mukesh Bansal, at least not in January. The company just raised $50 million from Premji Invest and others in January, following a year when it was forced to burn most of its cash in fending off deep-pocketed rival Jabong and, guess who, Flipkart.

The worst was behind it and by then large, global investors had shown willingness, at least in private, to invest in e-commerce, so Myntra could have raised more cash this year.

Then there was the personality aspect: Myntra’s Bansal is seen as a mentor by entrepreneurs including his namesakes at Flipkart and is much senior to them in age and experience.

He had rejected a similar merger idea put forth (in informal conversations) by common investors Accel Partners and Tiger Global Management late last year.

But as Flipkart’s Sachin Bansal reached out to Mukesh Bansal over the phone in late February with a serious merger proposal, the latter’s thinking had already changed to some extent.

According to conversations with Mukesh Bansal, and investors at the two Bangalore-based firms, four things convinced Mukesh to sell: the presence of common shareholders Tiger Global and Accel Partners offered familiarity and comfort; the mutual respect between him and his counterparts at Flipkart; the guarantee of access to a significantly large pool of funds that is unique to Flipkart; and finally, the nerve-wracking experience of the January fund raising, which was closed just as Myntra was due to run out of cash within couple of months.

In 2013, Myntra was looking to raise fresh funds but because of a number of factors—the depreciating rupee, overall negative sentiment about investing in India, Flipkart’s and Jabong’s aggressive push in fashion—most of the investors declined to risk putting in money into the company.

“The feedback from most of them was: we are interested and we like what you are doing, but not now. But we needed money then so ‘not now’ was not very helpful. We had cash till early 2014 so we were not in imminent danger of running out but still, six months of cash is nerve-wracking,” Mukesh said.

When Flipkart came to him with a proposal in February, the lure of money—Flipkart has raised $560 million, including $360 million in the past year—was much stronger.

From there on, it was only a matter of time before the deal was done. Flipkart and Myntra together generate more than 50% of the online fashion sales and the companies aim to increase that number to 60-70% over time.

Mukesh Bansal on Thursday announced the merger in style. Coming on stage, Bansal said he had an “exciting” announcement to make. Then, pausing, he said, “Let me introduce two colleagues of mine.”

And out walked Sachin and Binny Bansal.