Story Of The Week

SNAPDEAL MERGER WITH PAYTM TO END CRISIS?

Snapdeal’s cash reserves are falling fast and their inability to secure funds from its investors at the desired valuation. This is causing them to fall out of favor from both the customers and its investors. In order to stop Snapdeal fall out of contention for the top of the E-commerce industry in India, a merger between Snapdeal and Paytm is hinted. This could help them gain the favor of both the investors and the customers.

FACING SEVERE FINANCIAL PRESSURE

losses

Snapdeal, one of the largest e-commerce companies in India, is in a real tight spot. Jasper Infotech Pvt. Ltd, the company that runs Snapdeal at the end of year 2016 had just around Rs 1100 Crore to 1200 Crore cash left in the bank and around Rs 300 Crore to Rs 400 Crore at its payments unit Freecharge. This has made it critical for the company to conserve and to secure funds immediately in order to compete with the likes of Amazon and Flipkart. The monthly expenses of Snapdeal in 2016 was significantly lower than that of 2015, but the business required Snapdeal to spend to improve and replenish by raising new capital. Since there is a lack of infusion of new capital over the last year as compared to 2015, Snapdeal has suffered as the investors were feeling uncertain that the company will be able to challenge for the top spot in e-commerce in India. Snapdeal spent around Rs 200 Crore in September and October on advertising and marketing in order to reposition themselves and compete.

But the failure to secure funds had the following consequences:-

  • Snapdeal had to cut its expenses and as a result its monthly sales declined. Since the brand makeover, it had tried to position itself as a quality service provider. But its priority changed to conserve cash and secure funds which made it difficult to keep that image.
  • Snapdeal stopped working with affiliate networks which helped in driving traffic to its website in order to reduce costs.
  • It slashed its discounts to conserve cash which resulted in loss of customers to other e-commerce sites.
  • It is reducing its staff. Snapdeal had a headcount of about 8000 to 9000 at the start of 2016.This number went down to 4500 to 5000 people in June of 2016 and by the end of January 2017, the count has further fallen to around 3800 to 3900 people.
  • It also closed a shopping platform Shopo which was an online site for quirky and handicraft products after a year and a half of its operations.
  • Snapdeal also suspended an incentive programme for customers called the Snapdeal affiliate programme as it said to its affiliate partners that it will be unable to pay for the orders and its additional installations for its mobile applications.

 

DIFFERENCE IN VALUATION – SNAPDEAL TAKING A HIT

valuation

Snapdeal has further gone into a severe conservation mode after its discussion with Softbank was deferred because of the differences over valuation. The valuation discussed had a difference of almost Rs 20,000 Crore. If the deal would materialize, Snapdeal valuation would take a hit. Snapdeal has already lost significant market share to Flipkart and Amazon and has suffered losses almost doubling to that of its previous year. This deal will further severely hamper Snapdeal in terms of valuation. Although, Snapdeal is trying to attract new investors with a higher valuation, Softbank seems to be its best bet on funding.

Snapdeal currently has Rs 2000 Crore of cash in the bank but the funding market is slow, and the company wants to gain a large amount of funds to fight off the competition from both Amazon and Flipkart.

MERGER ON THE CARDS?

A significant hit on the valuation is likely and with Snapdeal finding it difficult to compete with Amazon and Flipkart, exploratory talks were held on merging the Paytm marketplace with that of Snapdeal in an all-stock transaction. Alibaba who has a 40 % stake in Paytm and 3% stake in Snapdeal was the key player here. Paytm has been given a deadline of March 31 by the Reserve Bank of India to spin off its marketplace.

If the merger talks succeed:-

  • Alibaba will become the new entity’s largest shareholder. Another key player will be Softbank which is not only s major investor in Snapdeal but also has a major stake in Alibaba.
  • Snapdeal by merging with Paytm would have a more streamlined process. Snapdeal has been suffering as Amazon’s cashback policy puts money back into the customer’s account while it gives virtual store credit. Its merger with Paytm could give it more resources to compete with Amazon and Flipkart in its discounting war.
  • The merged entity with Paytm’s payment banking license could then add customers when it offers its banking services. 
  • The valuation of these merged business could be well over $7 billion.
  • Efficiency will rise as there will be a reduction in administrative and marketing expenses

THE FUTURE AHEAD

Consolidation of the two companies is the need of the hour. With both Snapdeal and Paytm making losses, a merger may solve the problem by reducing administrative costs and the funding crunch problem of Snapdeal.

Exciting times are ahead in the E-Commerce industry. There is severe competition and the brick and mortar stores such as Shoppers stop and Lifestyle also adding to competition by implementing a mobile channel strategy. The trends of big mergers such as the merger between Make my Trip and Go Ibibo is on the rise, so a merger between Snapdeal and Paytm seems on the cards.

REFERENCES

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