NATIONAL LAW UNIVERSITY, JODHPUR

FLIPKART ACQUISITION OF MYNTRA: RISE OF E- COMMERCE

MARKET

(Assignment towards the fulfillment of the CAI)

SUBMITTED BY: SUBMITTED TO:

SUVIGYA TRIPATHI(1367) MR. ANAND KUMAR SINGH
B.A.LLB. NLU JODHPUR
UG- SEMESTER IX FACULTY OF LAW

NATIONAL LAW UNIVERSITY, JODHPUR

FLIPKART ACQUISITION OF MYNTRA: RISE OF E-COMMERCE
MARKET

INRODUCTION

MERGER AND ACQUISITION

In today's globalized scenario, competitiveness and competitive advantages have become the
buzzwords for corporate around the world. Merger and Acquisition in the e-commerce sector
have been on the rise in the recent past, both globally and in India. In this backdrop of emerging
global and Indian trends in e-commerce sector, this study illuminates the key issues surrounding
M & A in Merger and Acquisition with the focus on India.

Consolidation of Indian e-commerce sector through mergers and acquisitions on commercial

considerations and business strategies – is the essential pre-requisite. Today, e-commerce sector
is counted among the rapidly growing industries in India .The business world is being gradually
changed to an economy by the ever-increasing global competition, increased information
availability, knowledgeable consumers, changing relationships, rapid innovations, and
increasingly complex products. In the last few years, there have been paradigm shift in Indian e-
commerce sector. The Indian e-commerce sector is growing at an astonishing pace. Arelatively
new dimension in the Indian e-commerce sector is accelerated through mergers and acquisitions
Mergers and acquisitions are a response to new technologies or market conditions that require a
strategic change in a company's direction or use of resources. Compared to current management,
a new owner is often better able to accomplish major change in the existing organizational
structure. Myntra acquisition of jabong, flipkart acquisition of myntra and recently Walmart
acquisition of flipkart showcase the latest trend rise in acquisition among e commerce industry..

The rapid growth of e-commerce in India is being driven by greater customer choice and
improved convenience. India has an internet user base of over 200million users as of 2013. 3rd
largest internet population compared to markets like the US and the UK but is growing at a much
faster rate with a large number of new entrants. The industry consensus is that growth is at an
inflection point with key drivers of Increasing computer educational level, Increased Usage of
Internet, Rising standards of living and high disposable incomes , Availability of a much wider
product range (including online purchase from international retailers and direct imports)
compared to what is available at brick and mortar retailers ,Busy lifestyles, easy to find product
reviews, urban traffic congestion and lack of time for offline shopping , Lower prices compared
to brick and mortar retail driven by disintermediation and reduced inventory and real estate, user
experience, payment gateways & logistics etc. Flipkart is an e-
commerce marketplace unicorn company founded in 2007 by Sachin Bansal and BinnyBansal.
The company is registered in Singapore, but has its headquarters
in Bangalore, Karnataka, India. Flipkart has launched its own product range under the name
"DigiFlip" with products including tablets, USBs, and laptop bags.Flipkart's last fundraising
round in May 2015 had pegged its valuation at $15 billion. In May 2016, Morgan
Stanley lowered Flipkart's valuation to $9.39 billion.

Myntra is an Indian fashion e-commerce marketplace company headquartered in

Bengaluru, Karnataka, India. The company was founded in 2007 by Indian Institute of
Technology graduates with a focus on personalization of gift items. By 2010, Myntra shifted its
focus to the online retailing of branded apparel.

In May 2014, Myntra.com merged with Flipkart to compete against Amazon which entered the
Indian market in June 2013 .

ACQUISITION IN FLIPKART AND MYNTRA

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.

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 :

I. Revenues : By coming together, higher revenues will be realized than if the

companies operate separately.
II. Expenses : By coming together, lower expenses will be realized than if the
companies operate separately.
III. Cost Of Capital : By coming together, low overall cost of capital will be realized.

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
The major factors that forced Myntra and Flipkart to merge their ventures –

[A] Flipkart and Myntra Merge – Business Expansion and Market Consolidation
Flipkart has already acquired a large consumer base in e-commerce of Books, Electronics Goods
etc. So instead of struggling with its rudimentary vertical of Fashion and Lifestyle Products, the
acquisition of well trusted player of same domain, Myntra, was upright choice for Flipkart. More
than 150k product catalogue of Myntra helped Flipkart in enhancing its business vertical of
Apparel.
Flipkart co-founder and CEO Sachin Bansal stated about this acquisition that they, at
Flipkart, believed that they wanted to be leaders in every segment and fashion was a category
of the future, this acquisition would help us become leaders in this category.
Mukesh Bansal, Founder of Myntra, stated that they wanted to exploit their mutual synergies
(like the technology at Flipkart and market leadership of Myntra) in order to accelerate their
growth.
Flipkart also ensured the sector consolidation of e-commerce by acquisition of Myntra. It’s like
becoming one single known name when online shopping comes into mind. So the best strategy
for market consolidation of e-commerce is by incorporating all possible verticals into one single
business model.

[B] Consumer Base – Loyalty, Sharing and Acquisition

Before the Deal though e-commerce had made a remarkable presence in startup eco-system ,
loyalty of consumers was still in doubt. The availability of large number of players of same
domain, cash burn tactics for attracting customers, discount oriented mindset of public etc were
some of the reasons that were creating large turbulence in penetration and loyalty. Also, since the
acquisition cost of consumers was high for e-commerce players and switching cost was non-
existing so they both needed a large pool of loyal customers. Through the deal Myntra and
Flipkart were able to combine their loyal consumer base into a common pool.
Myntra claimed to have 8million registers and loyal user base while Flipkart has 18 million. So
the deal developed a large loyal market volume for both of the players.
Addressing the consumer behavior and acquisition, Sachin Bansal stated that Cost synergies
were not their priority for this deal, it was about scaling the two businesses in much faster to
expand market share in fashion.

[C] Market Competition – Biggies, FDI and Future

Market competition that both of the players, Myntra and Flipkart were facing was huge. All the
marketing capturing strategies could easily be replicated by biggies like Snapdeal, Amazon, E-
bay – strong enough in terms of funds, technology and manpower.
Also, the regulation of FDI was a big concern for both of the player. As the government was
planning to allow 100% FDI in retail, players like Amazon, Ebay, Walmart could have
introduced their own products and shifted to an inventory based model. Earlier model of Flipkart
was also inventory based before they faced capital issues and shifted to market based model.
The combined market share of both the players was already 50% which was expected to increase
up to 70% after this apparel concentrated acquisition. So the deal was a win-win situation for
both to stand against the market competition in long run.

[D] Loss Reduction by Combining the Services – Technology, Consumers, Logistics

So far, none of the e-commerce player had reported to achieve profitability in their business
model. High cash burn, forward and reverse logistics cost in poor infrastructure, technical
backend cost etc. were the factors contributing to this continuous loss of money for these
Ecommerce firms.
In 2013, Flipkart lost Rs 281 Crore (US$47 million) on revenues of Rs 1,180 Crore (US$197
million) while Myntra lost Rs 134 Crore (US$22 million) on revenues of Rs 212 Crore (US$35
million).
Combined services of both the players, shared logistics, technical backend, consumers would
help them in reducing this loss over revenue. So the deal was a win-win situation for Myntra and
Flipkart

[E] Investors Long Term Vision – IPO

Fashion is the business which is most profitable amongst the all products which are being
currently sold in online market places. And all other verticals introduced by Flipkart were
nowhere near the margins which fashion vertical was generating.
According to Indian stock exchange, a company that is losing money can’t come in picture for
Initial Public Offering. So Myntra as well as Flipkart were not able to go for IPO listing due to
their money loss and also have threat of running out of cash in near future.
IPO being the ultimate goal of VCs and the investors of both the companies Myntra and Flipkart
are same, Tiger Global, Acela Partners etc., the combined entity would be able to run longer with
their available funds and reduce their loss and become profitable in coming future.
So the deal would help investors to offer IPO sooner than running separately and make return on
their investments earlier.

[F] Rise of private label players – High profit margins

One major advantage to the retailers in India, and which works in favor of private labels, comes
from the fact that Indian consumers are less brand conscious and more quality and freshness
conscious. Retailers have increased their profits by offering private label products since there are
huge margins to be achieved from private label products, which are 30-40% higher margins than
branded products. Retailers are not any more offering low quality products for a lesser price, but
they are creating new level of differentiation, better pricing for a good quality product and new
merchandising and promotion strategies.
Flipkart which was earlier into branded product selling saw a better option through Myntra’s
private labeling strategy. Myntra’s association with numerous private label players was another
added advantage.
POST MERGER AND ACQUISITION

(On 22nd May 2014 Flipkart acquired Myntra in a deal estimated to be around $300 Mn) ―Both
companies are running at a very fast speed and winning on the competitive landscape, so we
don‘t want to change that at all‖ - Sachin Bansal (Co-Founder FlipKart.com). From a start-up
with an investment of just four lakhs rupees, Flipkart has grown into a $100 million-revenue
online retail giant in just five years. The combined entity has annualized sales of $1.5 billion,
which brings them within touching distance of much older offline ventures like the Future Group
( Big Bazaar), Reliance and Aditya Birla Group. Post-merger the team are very clear that the
businesses have to be executed independently and preserve a different culture. Independently,
Myntra and Flipkart's fashion category as billion dollar businesses each in two-three years.
While Myntra's fashion offering continues to be more on the premium side. Flipkart offers an
array of discounted fashion brands. The goal at Flipkart is to win the horizontal battle while at
Myntra is striving to win the vertical battle. Teams will remain different for both. Flipkart,
India's biggest e-commerce player, in first week of August‘2014 announced it has raised $1
billion or Rs 6,000 crore ($1 = Rs 60) in fresh funding, the biggest ever by an Indian internet
company in a single round. And it is aiming much higher. Flipkart is now expected to be valued
at $5 billion (Rs 30,000 crore), according to some estimates. The company has seen a turbo-
charged growth, hitting an annualised sales mark of $1 billion (Rs 6,000 crore) in 2014 - a year
ahead of its target. Besides looking at fresh acquisitions, Flipkart could use the fresh funding for
expanding its operations . Acquisition will be an important part of our growth strategy. For
Flipkart, the competition is also hotting up. Besides Amazon's expanding presence in India,
world's largest retailer Wal-Mart too has begun online sales in the cash-and-carry segment in
some cities. Reliance Retail, India's largest retailer by revenues, is also expected to significantly
increase its online presence.
Sales growth has also been boosted by increased discounts as Myntra, flush with funds after its
$50 million equity infusion in January and with access to Flipkart’s large cash war chest, has
been regularly offering price-offs of as much as 30-40%, compared with earlier levels of 25-
35%.Myntra’s daily orders have risen by at least 50-60% over the past four weeks on a
sequential basis, a person familiar with the matter said, speaking on condition of anonymity.
Myntra has a target of generating $1 billion in gross merchandise value—value of goods sold on
its site—by 2016. It gets to keep a cut of that. Myntra reported net sales of over ₹212 crore for
the year ended 31 March 2013.

CONCLUSION

There are numerous reasons why companies decide for strategic alliances. Some studies indicate
that companies merge for improving efficiencies and lowering costs. Other studies show that
companies acquire to increase market share and gain a competitive advantage. The ultimate goal
behind a merger and acquisition is to generate synergy values. Good strategic planning is the key
to understanding if synergy values do in fact exist. A well-researched and realistic plan will
dramatically improve the chances of realizing synergy values. The strategic partnership of
Myntra and Flipkart will provide a guidance for traditional players. They’ll leverage existing
capabilities and platforms by pursuing adjacent growth. They can expand to vertical segments,
collaborate with brands by designing their websites and open offline stores to grow their
customer base. The rapid growth of Indian e-commerce (especially eretail) are attracting global
players and increasing investors’ interest. India needs to extend the benefits of the Internet into
sectors of the economy that have so far not been touched. Strong internet infrastructure need to
be extended beyond the top cities into Tier 2 and Tier 3 cities, and deeper into the semi-urban
and rural parts of the country, that are home to 70 percent of the population and represent an
estimated 50 percent of total household consumption. The Indian government has restricted
foreign companies from selling their products in India through the online medium. This
regulation safeguards Indian companies against competition from global leaders such as eBay
and Amazon. Currently, 100 per cent FDI is allowed in business-to-business (B2B) e-commerce
in India, but when it comes to business-to-consumer (B2C), it is prohibited. Besides, there is a
mandatory 30 per cent local sourcing norm for foreign players.
Myntra acquisition of jabong, flipkart acquisition of myntra and recently Walmart acquisition of
flipkart showcase the latest trend of rise in acquisition among e commerce industry due to
growing customers and purchases in e retail sector due to increase in resources such as mobile
phones and internet connectivity along with awareness of operation of e-commerce platform.
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