On 10 April, Flipkart announced a new funding round and the acquisition of eBay India. Let us look at this development through the filter of something previously discussed in this column: the winner-takes-all nature of e-commerce.
Since there is little differentiation between e-commerce firms, price becomes the sole differentiator. The company with most money to burn wins, while others sell out, usually to the winner. This may be simplistic, but it captures the essence of how e-commerce has played out globally.
India is witnessing that scenario right now. Flipkart just announced acquisition of eBay India, and is likely to strike a similar deal with Snapdeal.
Does this change the endgame? Can Flipkart outlast Amazon India? Or somehow settle into a stable duopoly beating the global trend? Or is it just delaying the inevitable? And what of Alibaba Group Holding Ltd?
The winner-takes-all nature of e-commerce has not changed at all. And it will not until firms find a way to differentiate. Do customers see any real difference between Amazon and Flipkart? Both have great customer service, and similar merchandise. Even the frills are the same: if one has Amazon Prime, the other has Flipkart First.
Does this acquisition change the endgame for Flipkart? Let us go through the arguments.
Unique positioning of the acquired company: if the acquired company has unique strengths, it probably wouldn’t be up for acquisition. One argument could be that the target is strong in a certain segment such as a product category or geography. That may be true but it does not take that much effort or time to build from scratch. One has to only see how Amazon India has grown.
Synergies with the acquired firm: the less said about this, the better, but we would be happy to be proven wrong. Flipkart’s deal-making has always been more about value buying, or common investors triggering a consolidation, than tapping synergies. Making the most of the opportunity of Rocket Internet pulling out of India, Flipkart snapped up Jabong for a song at $70 million. Its acquisition of Letsbuy and Myntra was triggered by common early stage investors. Its next buy Snapdeal, if the deal closes, will happen for similar reasons. With no home-grown mid-stage to late-stage venture funding available in India, Snapdeal is left with no choice but to sell.
One oft-heard argument is that by buying everyone else, Flipkart will acquire such scale that it will either be able to survive stand-alone or force either Alibaba or Amazon to buy it.
Given that all e-commerce firms are losing money, being bigger may just mean losing more money. Also, scale and customer base are meaningful only when entry barriers exist and there is some sort of customer loyalty. Otherwise, both are just vanity metrics.
However, it is true that by acquiring all other rivals, Flipkart’s ability to present itself as the sole alternative to Amazon to investors and customers increases.
There are other reasons for investors to back such acquisitions. The incentives of fund managers may not be aligned with those of the company.
Many such deals are driven by investors such as Tiger Global and SoftBank, explained a limited partner (an investor in venture capital and private equity firms) from Hong Kong. In Flipkart’s case, Tiger has been an investor in the company for more than seven years and has to start thinking of providing liquidity to its investors. A deal to acquire Snapdeal, with an added deal for money from SoftBank (the single largest shareholder in Snapdeal), may provide this, this person added.
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New investors may be driven by a different logic, the limited partner explained. This could be strong liquidation preference terms that reduce downside risk. Or it could just be the opportunity to back a winning horse—or, at least, one that has a better chance of at least being there when the last race is run.
Shrija Agrawal is Mint’s deals editor. Due Diligence will cover issues in India’s venture capital, private equity and deals space.