FLIPKART-MYNTRA ACQUISITION
CONTENTS
1. Merger and Acquisitions 2. E-commerce Industry in India 3. E-business Model 4. Flipkart Pvt Ltd 5. Myntra.com 6. Flipkart-Myntra 7. Conclusion
1. Merger & Acquisitions
Both these terms are aspects of corporate finance, strategic management and companies dealing with buying, selling and combining two or more different companies and similar entities that can help a company grow at a higher rate in its existing industry or a new industry or location, without creating a subsidiary to run the added operations. M&A result in restructuring of an organization with an aim to increase growth rapidly. The process is very complex, with many dimensions influencing the outcome. Whether the purchase of a company is perceived as being a "friendly" or a "hostile" one depends significantly on how the proposed acquisition is communicated to and perceived by the target company's board of directors, employees and shareholders. In an acquisition, both companies may continue to exist. However, in a merger he acquiring company continues to do business whereas the acquired company gets integrated into the acquiring company and thus ceases to exist after the merger. As a result of either merger or acquisition, companies get access to new markets and industries that were previously unaccessible due to cost, regulations or indirect barriers like the ability to create resources such as capital, knowledge and labor. Challenges come from foreign competitors entering the domestic markets and from local competitors reducing their product or service costs through global sourcing, moving operations offshore or gaining economies of scale by venturing into new markets. Globalization requires firms to become more streamlined and efficient while simultaneously extending the geographic reach of their operations. Thorough Planning and execution are essential for a successful strategic alliance. Integration is reached only after mapping the processes and issues of the companies to be merged. Even then just 23% of all acquisitions earn their cost of capital. When M&A deals are announced, a company’s stock price rises only 25% of the time. In acquired companies, 44% of executives leave within the first year, and 70% leave within the first three years. Synergies projected for M&A deals are not achieved 65% of the time. Productivity of merged companies can be affected by up to 40% in the first year and financial performance of newly merged companies is often lacking. Using the Internet for transactions and coordination can save time and money on delivery of goods by using rich information flows to simplify and streamline the flow of goods in the supply chain.
2. E-Commerce Industry in India
The internet market in India is unique and huge. Already with a user base of 190mn users, it has exponential growth opportunities in terms of participation and penetration. The internet market in India is driven by Bandwidth Content Increasing disposable income Increase use of plastic money.
Its evident that internet businesses have strong growth and cash flows and that Internet businesses will soon gain relevance in equity markets as commercial businesses scale up. The two key business models for internet are Online retail – Where leaders like Flipkart have high user engagement though facing intense competition from peers with increasing reach such as Amazon and E-bay. Advertising – which has strong growth potential due to increasing internet reach and increase in customer reach by corporates.
From a business perspective, the Indian internet market is dominated by online travel with air travel being the key contributor followed by railway and hotels. Other key businesses like online retail were then added to india’s internet market. The Indian e-commerce industry was worth INR75,000 crore, in 2013, according to a joint report by KPMG and IMAI. India holds the potential to double its economic contribution via Internet, from 1.6% GDP at present to 2.8 and 3.3% by 2015. Indian internet industry is also likely to generate employment for 1.45 million people in the coming two years. With the emergence of the new government and its innovative policies, there are hopes of bringing FDI in e-commerce for local marketplayers. Marked as the biggest coming together of two internet giants in the e-commerce space in India, this report puts light on Flipkart and fashion e-tailer Myntra M&A which jointly exposes their vision to acquire more than 50% e-market share by strategic alliance. As Flipkart’s annual sales crossed over INR6,100 crore a year ahead of the set target which was it was estimating to reach the billion dollar mark for gross merchandise value by 2015; on the other hand Myntra’s revenue was about INR1,000 crore in the previous financial year. Myntra is aiming to increase its revenue in the next financial year as it expands its customer base and is adding more products following China’s biggest eretail Alibaba.com. Myntra has about 100 sellers and plans to increase the number to 1,000 by fiscal end. The strategy of Flipkart is to invest around INR600 crore in its fashion business in coming years to take on global rivals like Amazon and eBay Inc.
3. E-Business Model
The E-Business model is founded on four main aspects which are product innovation, customer relationship, infrastructure management and financial aspects The products and services which a firm offers, representing a substantial value to the customers, and for which they are willing to pay i.e. Value proposition. The infrastructure and the network that is necessary in order to create value and to maintain a good customer relationship. The relationship capital the firm creates over the years and maintains with the customers, in order to satisfy their needs and to generate sustainable revenues. The financial aspects, which can be found throughout the three former aspects, such as cost and revenue structures.
4. Flipkart Pvt Ltd An Indian company that was founded in 2007, by two IIT Delhi graduates Sachin and Binny Bansal. It is an online website that focused only on books during its initial years and soon expanded and started offering other products like consumer durables, lifestyle products etc. It is registered in Singapore, and owned by a Singapore-based holding company. Flipkart has more than 9000 employees. Flipkart accepts payments through methods such as cash on delivery, credit/debit card details, net banking through registered banks and card swipes on delivery. Initially, the founders had spent 4,00,000 only for making website to set up the business. The other fundings in ($ US millions) has been :
Some of the past acquisitions of Flipkart : YEAR
COMPANY ACQUIRED
2010 2011 2011 2012
WeRead Mime360 Chakpak.com LetsBuy.com
Financial Health :
1. In the financial year ended March 2013 Flipkart reported a total loss of INR281.7 crore as compared to its previous year loss of INR110 crore. 2. Revenues increased to INR1,180 crore from INR205 crore in the previous year. 3. Operational expenses jumped to INR1,366 crore from INR265.6 crore last year. 4. Cash balance dropped to INR166.2 crore on 31st March 2013 from INR236 crore a year ago.
Business Model : The company changed its business model in February 2013, moving from online retail to the marketplace model. Marketplace model includes third parties using company’s website as a platform to sell products to customers. Companies working on the marketplace model get easy access to overseas funds, and it also allows e-commerce companies to save on inventory-related costs as the products are held by third parties.
5. Myntra.com It is an online website that does business in fashion and lifestyle products. It currently has more than 500 brands and over 50,000 products that are delivered across India using its distribution network. Some of the fundings in Myntra in ($ US millions) has been :
6.
Flipkart-Myntra Acquisition
The main idea behind any merger and acquisition is to gain competitive advantage over others in global market and to accelerate company’s growth particularly in situations when its growth is restricted due to lack of resources. For entering in a new industry/market, the company may lack the technical workforce and may require special marketing/advertising skills and a distribution network to access different segments of market. The merging of the two companies creates additional value which is called synergy value. Synergy value can take three forms : Revenues : By coming together, higher revenues will be realized than if the companies operate separately. Expenses : By coming together, lower expenses will be realized than if the companies operate separately. Cost Of Capital : By coming together, low overall cost of capital will be realized.
Many mergers are driven by the need of the companies to cut operational costs. However, the best mergers seem to have strategic reasons for the business combinations. These are :
Positioning : Taking advantage of the future opportunities that can be explored when the two companies function together. Gap-filling : By combining two companies, one company can compensate for the weaknesses of others. Eg. A company with a poor distribution channel can take help from the resources of the company it is merging with. Bargain Purchase : Instead of building internal systems, it might be cheaper in some circumstances to buy another company that already has a functional system. Diversification : Companies looking for long-term growth and profitability may invest in other industry businesses. Short term growth : Sometimes, a M&A is done to turnaround poor growth and profitability. It can be used as a tool to boost performance. Undervalued Target : Some M&As are carried out for financial instead of strategic reasons. A company thus undervalued in the market can be seen as a potential investment by another company.
Flipkart switched to market place model in Feb 2013 through which third party merchants can sell goods to shoppers using flipkart website. It allows e-commerce companies to scale up their businesses faster, save transportation and other inventory related costs as the products are held by merchants. For Flipkart, setting up a seperate fashion vertical meant boosting margins, because fashion has the highest margins i.e. 35 to 40 % among all products sold online. On the other hand, Myntra has big plans with its private brands like Anouk, Dress berry and Roadster, which promise margins as high as 60 per cent. Myntra will function as a separate brand, and its founder Mukesh Bansal will occupy a seat on Flipkart's board, heading the fashion vertical at the new entity. Flipkart will bring in its capabilities in customer service and technology. Both the companies will also retain customers that have shopped on both websites and that is about 80 per cent of the country's online shoppers have shopped on either Myntra or Flipkart. However, the companies will not integrate the back end.
7. CONCLUSION
There are many reasons because of which companies decide for strategic alliances. The reasons vary from improving efficiencies to lowering costs to increasing market share or to gain competitive advantage. The ultimate goal behind an M&A is to generate synergy values. A thorough strategic planning is the key to understand if synergy values do exist. A well researched plan will increase the chances of realizing synergy values. The strategic partnership of Myntra and Flipkart can be used to – To pursue adjacent growth To expand to vertical segments To collaborate with brands by designing their websites To open offline stores
