flipkart myntra merger

8/10/2019 Flipkart Myntra Merger

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Why Flipkart-Myntra may

succeed: They are notchasing mythical synergies By R Jagannathan

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Is the Flipkart deal to buy Myntra , formally announced yesterday (22 May), adefensive move to fend off potential global rivals or an aggressive one to dominate theonline marketplace in India? What are the chances that the acquisition will succeed,given that both companies make huge losses and continue to bleed cash, and given theglobal M&A track record of more failures than successes?

The answer is that the deal is a mix of both defensive strategy and offensive thinking.Its defensive because the horiz ontal e-marketplace is about to becomehypercompetitive with the arrival of Godzillas like Amazon and the rise of portals likeSnapdeal; also, the fashion vertical, which is likely to become the most profitable nichein e-tailing, needs more investment in logistics and brands, including the development ofowned-brands that can yield higher margins.

In fashion, Myntra, despite its early lead, has to fend off the challenge of Jabong andneeds lots of investment. Flipkart, which tried its own hand at fashion retailing, has been

an also-ran so far. With Myntra it will have over 50 percent of the online fashion market.The deal thus builds a fence around both Flipkart and Myntra.The offensive part of the deal lies in the future potential. Between them, Flipkart andMyntra have touched base with 80 percent of Indian e-shoppers. This gives thecombined entity potential dominance of the space where Amazon will do its damnedestto wrest control by investing heavily in customer acquisition.

But lets be clear, its not going to be a cakewalk. Both companies continue to bleed and

their valuations are rich. As Mobis Philipose points out in Mint newspaper, while ChinasAlibaba expects a valuation of $150 billion when it lists in the US (0.6 times grossmerchandise sales), Flipkart-Myntra gets 1.6 times the gross sales value as valuation.Quite obviously, this higher multiple comes from being at the cusp of spectaculargrowth, but that potential is yet to be reached.However, the biggest plus in the Flipkart-Myntra deal is that it is not driven by theillusion of excess synergies. Most mergers in the world are driven by expectations of
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cost and marketing synergies where the strengths of one company are supposed to ruboff on the other and vice-versa, making one plus one adds up to eleven.

But neither Myntra nor Flipkart seem overly enamoured of such synergies. In fact,

Myntra CEO Mukesh Bansal seems to have made the separation of the two businessesa key pre-condition to agree to the acquisition. Mukesh is quoted by Mint as saying thatmergers are risky and can be very dicey and it was very important to me to ensure

that we would not be in tegrating anything. That is a huge bit of wisdom for a 38-year-old entrepreneur who shares his surnamewith Flipkarts founders, Sachin and Binny Bansal (none of the Bansals are related to

one another).

Sachin Bansal, speaking to Business Standard , echoes the same sentiment. He said:

Myntras brand stands for something uniquein (the) consumers mind and we want toleverage that. Similarly, on the Flipkart side, the consumer base is different and peoplego to Flipkart for a different reason. So, by trying to combine the two companies wewould lose value. Keeping them independent allows us to benefit more. This is smart thinking because the reality is that mergers are driven by arithmetic andaccountants (reducing costs, expanding the repertoire of products, gaining marketshare) without keeping customers in mind. Brands are psychically owned byconsumers, and trying to combine two brands that stand for different things in the

consumers minds can defeat the very purpose of acquisitions. The decision to keep theFlipkart and Myntra businesses and brands separate is thus bang-on.

Moreover, the two companies operate on different business models. While both startedout as inventory-led businesses (where the company builds warehouses and takes careof delivering ordered products by itself), this is an expensive way to do business. Moste-commerce companies thus follow the ebay marketplace model, where the companybrings buyers and sellers together, but leaves the fulfillment of the orders to thirdparties. This reduces upfront investment costs, but also reduces the consumer

experience, since the fulfilment of orders can be time-consuming and oftentroublesome.

Amazon follows the inventory-led model and Myntra largely does the same. In India,since foreign players are banned from e-tailing, Amazon follows the marketplace model,but this could change. Flipkart started out as an inventory-led e-tailer, but has more
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recently shifted to the marketplace model to conserve cash-burn. At the time of theacquisition thus Flipkart and Myntra were following different business models. The advantages and disadvantages of both models are the following: marketplacemodels are capital-light, but not as consumer-friendly. Inventory models suck up lots ofcash, but companies can control the consumer experience better. Marketplace models,since they depend on commissions from sellers, tend to have lower margins whileinventory-based models, especially if supplemented with own brands, tend to yieldhigher margins. Marketplace models have quicker payoff periods, and the inventory-model can see payback periods stretching out.

Outside the biggest e-commerce space of travel and ticketing services, the Indian e-tailing business is reckoned to be worth $3.1 billion and could grow at a fast clip of 30-40 percent over the next few years.

This is why the Flipkart-Myntra deal makes long-term sense. It is built on soundexpectations, with few illusions about the mergers bringing synergies. Whenentrepreneurs avoid synergy talk, the chances are the acquisition will succeed.
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flipkart myntra merger

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