MERGERS AND ACQUISITIONS

FLIPKART-MYNTRA-JABONG-
WALMART DEAL

Group 3

Venkatachalam V (63)

Kamakshi Joshi (128)

Rimjhim Nigam (138)

Sruthi Purushothaman (145)

Abhishek Ray (148)

Vasundhara Slathia (158)

 Flipkart-Myntra Merger
Myntra and Flipkart are two most common names of Indian e-commerce. Both started their
journey in 2007, grew exponentially in terms of products, business verticals, fund,
consumers, market share by changing their model continuously as per market demand and
finally both merged together in 2014. The market exit of Myntra in 2014 is one of the
successful and remarkable exits in Indian startup eco system.

Entry of Ecommerce and its acceptability to customers paved a way for boom in online
fashion market. Number of players emerged and competitive pricing ensured that middle
class consumer would now be presented with fashion related products which were earlier
out of their reach. General public of metro cities, which was riding on the wave of better
standard of living, was now able to think beyond brick n mortar stores and was ready to
experiment by buying cloths and beauty items from virtual stores.

Myntra – Typical Timeline

2007 – Myntra was founded by MukeshBansal, AshutoshLawania and VineetSaxena with a
focus on on-demand personalization of products, gifts and merchandise. In the time span of
3 years, Myntra claimed to offer personalized products like T-Shirt, Mugs, Mouse pads,
Calendars, Watches etc across 33 categories and ship to 900 locations across 40 countries
worldwide.

2011 – Myntra changed its business model from personalized gift items to fashion and
lifestyle products. Myntra offered products from 350 Indian and International Brands by
2012.

2012–Myntra acquired SherSingh, the private label online brand specializing in sports-
inspired lifestyle apparel for man and women and Exclusively, a boutique ethnic wear portal
and also the parent company of SherSingh.

2013 – Myntra acquired Fitiquette, San Francisco based technology solution which is a
virtual fitting room to expand its technology platform and drive transformational change in
the online shopping space in India by providing world-class experience to its customers.
2014 – Myntra was acquired by Flipkart with the deal value being approx US$ 300 million,
though no official data was disclosed by any of the companies. Myntra still continued to
operate independently. In 2014, Myntra’s portfolio included about 1,50,000 products of
over 1000 brands ranging from international brands to designer brands and distribution
area of around 9000 pincodes in India.

2015 – In May 2015, Myntra shut down the transactions via its website and moved to App-
Only business model. Myntra claimed to have 95% internet traffic and 70% sale by mobiles
users. Also, in May 2015, Myntra acquired Native5, Bangalore based mobile app
development platform to strengthen its mobile technology.

Buying Company (Flipkart) Features:

 Flipkart, an Indian e-commerce company headquartered in Bangalore, Karnataka

was started in year 2007 by Sachin Bansal and Binny Bansal IIT –Delhi alumni who
had jobs with Amazon before starting Flipkart.

 It is considered as the e-commerce company that made online shopping popular in

India.

 The business was formally incorporated as a company in October 2008 as Flipkart

Online Services Pvt. Ltd.

 During its initial years, Flipkart focused only on books, and soon as it expanded, it
started offering other products like electronic goods, air conditioners, air coolers,
stationery supplies and life style products and e-books.

 Flipkart's offering of products on cash on delivery is considered to be one of the

main reasons behind its success. Flipkart also allows other payment methods - credit
or debit card transactions, net banking, e-gift voucher and card swipe on delivery.

 Flipkart had raised funding from venture capital funds Accel India (US$1 million in
2009) and Tiger Global (US$10 million in 2010 and US$20 million in June 2011). In
August 2012, Flipkart announced the completion of its 4th round of $150 million
funding from MIH (part of Naspers Group) and ICONIQ Capital. The company
announced, on 10 July 2013, that it has raised an additional $200 million from
existing investors including Tiger Global, Naspers, Accel Partners and Iconiq Capital.
 In July 2013, Flipkart raised USD 160 million from private equity investors, taking the
total to USD 360 million in its recent fund raising drive to build and strengthen
technology and bolster its supply chain.

 In October 2013, Flipkart raised an additional $160 million from new investors
Dragoneer Investment Group, Morgan Stanley Wealth Management, Sofina SA and
Vulcan Inc. with participation from existing investor Tiger Global.

 With this, the company raised a total of $360 million in its fifth round of funding, the
largest investment raised by an Internet company in India.

 The company valued at approx. 99 billion (US$1.7 billion) (Nov 2013).

 Flipkart has launched its own product range under the name "DigiFlip", offering
camera bags, pendrives, headphones, computer accessories, etc.

 Flipkart had always used acquisition as a strategy for growth and consolidation.
Before acquiring Myntra in May 2014, it had acquired the following small players in
e-commerce.

o 2010: WeRead, a social book discovery tool

o 2011: Mime360, a digital content platform company

o 2011: Chakpak.com, a Bollywood news site that offers updates, news, photos
and videos. Flipkart acquired the rights to Chakpak's digital catalogue which
includes 40,000 filmographies,11 10,000 movies and close to 50,000 ratings.

o 2012: Letsbuy.com, an Indian e-retailer in electronics. Flipkart has bought the

company for an estimated US$25 million. Letsbuy.com was closed down and
all traffic to Letsbuy have been diverted to Flipkart.

o 2014: Acquired Myntra.com, Marking the biggest consolidation in the e-

commerce space in India, for an estimated Rs 2,000 crore deal.

Myntra Merger with Flipkart – A Win-Win Deal for Both

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.

[B] Consumer Base – Loyalty, Sharing and Acquisition

Before the Deal though e-commerce had made a remarkable presence in start-up 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 behaviour 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.

[E] 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.

[F] 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, Accel 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.

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

One major advantage to the retailers in India, and which works in favour 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 labelling strategy. Myntra’s association with numerous private label
players was another added advantage.

Deal Financials-
This Flipkart-Myntra deal is the country’s first sizeable consolidation in e-commerce; a
market estimated at 2 billion dollars (Rs 12,000 crore) of the organized retail pie of 40 billion
dollars (Rs 2.4 lakh crore) and a total sector size of 600 billion dollars (Rs 36 lakh crore). E-
commerce could cross 20 billion dollars a year in India in the coming few years, according to
analysts.

The long-awaited, cash-and-stock deal is likely to value online fashion retailer Myntra at
more than $330 million (about Rs 2,000 crore)

Flipkart was valued at $2-2.5 billion after the deal.

Features of the Deal-

 On completion of acquisition Sachin Bansal, Co-Founder FlipKart.com said “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”. 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. The company has seen a turbo-charged growth,
hitting an annualized sales mark of $1 billion (Rs 6,000 crore) in 2014 - a year ahead
of its target.

Synergy
As India's gathering of online clients grows, so will the routine and online players that make
splendid and key moves to value the noteworthy offer by streamlining operations for
advantage. The essential thought behind any merger and acquirement is to get high ground
in overall market and revive association's advancement particularly exactly when its
advancement is constrained as a result of lack of advantages. For entering in new
thing/showcases, the association may require concentrated capacities and might require
novel showcasing capacities and a wide allocation framework to get to different segments of
market. The joining or merging of the two associations makes additional regard which we call
"agreeable vitality" esteem.

Synergy quality can take three structures:

1. Revenues: By combining the two companies, they will realize higher revenues then if
the two companies operate separately.

For Flipkart, setting up a huge fashion vertical means boosting margins, because
fashion has the highest margins - 35 to 40 per cent - among all products sold online.
 Myntra also had its private brands like Anouk, Dressberry and Roadster, which
promise margins as high 60 per cent.

Operational Synergy – by increasing market share and becoming more dominant

By joining forces, Flipkart and Myntra would realize huge cost savings on customer
acquisition as they basically target the same customer and demographic base.
Combined company would control the major E-Commerce of India resulting in
significant economies of scales.

Amazon, with its well-oiled machinery, was ready to fight against all players of E-
Commerce in India which both Flipkart and Myntra would better be able to face as a
combined entity.

2. Expenses: By combining the two companies, they were able to realize lower expenses
then if the two companies operate separately.

Cost optimization – by using common resources as they have common vendors.

While Flipkart banked on Myntra's fashion expertise and expanding its base of vendor
brands (currently around 650), Myntra leveraged Flipkart's logistics network. Flipkart
used to ship books to almost all of India's 21,000 PIN codes, and also covered more
than 100 cities for its entire product portfolio of 20 categories, including consumer
electronics, office supplies, and health and beauty products. Myntra reaches 30 cities
with its own logistics network, Myntra Logistics, and around 9,000 PIN codes via third-
party logistics companies.

Flipkart will also bring in its capabilities in customer service and technology. 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 players, shared logistics, technical backend, consumers

would help them in reducing this loss over revenue
 3. Cost of Capital: By combining the two companies, they experienced a lower overall
cost of capital.

Accel Partners and Tiger Global are investors to both Flipkart and Myntra. Their
merger would concentrate the investments from both the companies, helping them
to reach revenue and profitability targets much quicker.

4. Gap Filling: One organization might have a noteworthy shortcoming, (for example,
poor circulation) though the other organization has some critical quality. By joining
the two organizations, every organization fills-in vital crevices that are key for long
haul survival.

Pants into new business: For Flipkart, the biggest selling category has been
electronics, but with this deal, the company hoped fashion will be the biggest within
a few months.

Structure of the Deal and Sectorial conditions Post-Deal

 It was a 100% acquisition. The current investors in Myntra remained so and no exit
took place.
 Myntra continued to function as an independent entity and so did the fashion division
of Flipkart.
 Only Mukesh Bansal from Myntra joined the Flipkart board. He headed the fashion
business for Flipkart.
 All the Myntra employees got the universal stock options.
 $100 million was planned to be invested in Flipkart fashion business in coming years.
 There are no immediate plans of integrating the duo but the possibilities will be
explored in near future.
 There were enough funds with Flipkart to sustain for long, hence there were no
immediate plans for next round of funding.
 Flipkart was definitely eyeing for an IPO but was not at their priority list.
 Flipkart planned to go Alibaba way rather than the Amazon way due to more
similarities in between Indian and Chinese consumers.
  There’s no threat to Myntra’s online fashion dominance by Amazon.
 Flipkart aims to grow its fashion/apparel business to an extent that it accounts to 30%
of their revenue shares.
 Key stakeholders in Myntra have become millionaires with this deal.
 Myntra continues to hire and expand. Have global ambitions as well.
 Together, Flipkart and Myntra had over 50% share in the online fashion market in India
(Myntra’s current share is ~30%) it was expected that it will grow to 65% till 2015.
 Acquisition discouraged the growth of Snapdeal, Jabong etc.

FLIPKART MYNTRA PERFORMANCE POST DEAL (FY15)

“Cost synergies are not our priority for this acquisition. It was about scaling the two
businesses in much faster to expand market share in fashion”.These were the words of Mr
Bansal.

To increase their market share Flipkart introduced Flipkart first similar to the Amazon’s Prime
program, which company has yet to launch in India. Myntra started offering 30-40% discount
after the infusion. Also, due to the fact that they were getting funding by Premji Invest.

Because of all such activities Flipkart’s Revenue nearly increased 9 folds from FY13. This is
Flipkart’s revenue growth (not GMV) for FY13-FY15.
Flipkart lost Rs 2,583.1 cr in FY15

Losses have also grown with its revenue. But, despite the sharp jump in the operating losses
in absolute terms, it is actually good news for the company because Operating margins have
improved steadily

FLIPKART MYNTRA PERFORMANCE POST DEAL (FY16)

In FY16, Flipkart ltd reorganized the company into three units

 New initiatives, headed by (CEO) Sachin Bansal

 Supply Chain,headed by (COO) Binny Bansal
 Marketplace, Retail and Marketing headed by Mukesh Bansal

Reason for this restructuring was to sharpen its focus on improving its technology and
expanding its supply chain.

In FY16, Flipkart faced intense competition from Amazon, which has committed to invest $5
billion in India because of which they have to further reduce their prices which resulted in
huge loss and decreased operating margin.

It tarnished the image of Flipkart for some time,Forbes Magazine published an article on “Is
flikart going to be Another Kingfisher”.

Investment firm Vangaurd Group reduced it’s stake in Flipkart by 33%. Morgan Stanely
slashed the valuation of a firm at $5.57 Billion from last Year’s valuation of $15.2 Billion.
 MYNTRA – JABONG MERGER
Sectoral conditions Pre-Deal
With a total internet user base of about 450 million people, which currently amounts to 40%
of the total population, India has become one of the hottest destinations for online startups.
It is one of fastest growing e-commerce markets, adding more than 6 million users every
month.
When it comes to the compound annual growth rate (CAGR) for e-commerce, India sits in 2nd
place at 23 percent. This is why everyone is eyeing to capture this multibillion dollar market
with large firms like Amazon and local players like Flipkart going at each other to take the
helm.

It all started in 2012 when Amazon started to test the Indian waters. However, the
ecommerce sector by that time was already buzzing with local players such as Flipkart,
Snapdeal, Paytm, Myntra, Jabong, eBay India, etc. Amazon entered the Indian ecommerce
sector late around 2012 with the launch of junglee.com. By that time, the market was already
captured by several local players. Flipkart, which already had a head start of 5 years
over Amazon was doing well, and several other players like Paytm and Snapdeal (both
launched in 2010) were also growing staggeringly.

Before Amazon had put its foot in India, the e-commerce sector was garnering huge
investments. By the end of 2011, around $350m had been poured into 40 Indian e-commerce
startups. Two years prior to it, that number stood only at $43m invested into 11 start-ups.
But when Amazon ventured into the Indian market, everybody knew the market was set to
explode. Amazon had deep pockets and Jeff Bezos had explicitly mentioned his intentions to
capture this crucial market.

In July 2015, Flipkart went back to its investors and raised another $700m, valuing the
company at $15bn. This was the time when Flipkart was facing heat from Amazon as the latter
showed prominent growth in the last couple of years. Snapdeal, which was a distant third
player in this fight, had mobilized around $1.5bn up till this date. There were several
speculations that the e-commerce market in India had reached its inflection point, with so
much money being invested.
The next year in June 2016, when Jeff Bezos personally visited India, Amazon gave everyone
a shock (especially Flipkart), upon its announcement that it would invest an additional $3bn
in India.
With Amazon already closing the gap between itself and Flipkart, this investment gave a huge
boost to the company. By now, Amazon was breathing down the neck of Flipkart in a close
second place. It was at this point in time, Flipkart’s Myntra acquired Jabong for $70 million.

Features of Buying and Target Company including Business details,

products, services, financials, HR policies, any other competitive features
In 2016, Myntra, a Flipkart Group company, acquired Jabong from Global Fashion Group (GFG)
for $70 million in cash, creating one of the biggest online fashion destinations in the country
as well as the largest e-commerce marketplace in India. The acquisition would help Flipkart
take on global rival Amazon, which continued to make inroads into consumers’ wallet and
mind space.

Following a strategic review of its Indian operation, the GFG Board concluded that Jabong’s
position as India’s leading fashion e-commerce destination would be best served through a
business combination with a local player. Having reviewed multiple options over a period of
several months, the GFG Board has resolved to sell Jabong to Flipkart Group. The purchase
was made by Flipkart's fashion unit Myntra, and the combination would help the company
take on the increasing competition from Amazon Fashion in India.

Myntra and parent Flipkart together held 60 per cent share of the online fashion and lifestyle
market in the country. With the acquisition of Jabong, the trio would together command a
whopping 75 per cent. The deal was crucial for Flipkart because the fashion and lifestyle
category is set to overtake electronics by 2020, according to a Google and AT Kearney
forecast.

Myntra is a mass premium destination brand with a strong focus on men’s categories (60
percent of its customers are men). Private labels (a total of 11 brands) are an important part
of Myntra’s offerings and have a stack share of 20 percent of its revenue. Meanwhile, the USP
of Jabong is that it is more women-centric (60 percent of its consumers are women) and it
has a strong portfolio of international brands. Jabong is also stronger in certain geographies
such as Delhi-NCR.

Jabong’s loyal customer base of four million monthly active users combined with Myntra’s 11
million customers and a combination of some of the most iconic brands that would be
exclusive to both platforms — including Dorothy Perkins, Topshop, Tom Tailor, G Star Raw,
Bugatti Shoes — would set the company on the path to becoming India’s largest fashion
platform.

From the group perspective it made sense because Flipkart + Myntra + Jabong could now
operate on all parts of the market and continue to actually shape the market.

Now, let’s look at what benefits Flipkart & Myntra will get from the deal:

 Market leader of Life Style and Fashion segment:

With the acquisition, Flipkart, Myntra & Jabong will together hold 75% of the
category making them the undisputed leader. This comes after Myntra had acquired
HRX, private brand owned by Hrithik Roshan.

 Future Strategy:
The life style and fashion segment is slated to overtake electronics segment by 2020.
Also, the segment is expected to contribute 37% of the $110 Billion e-commerce
industry by 2020. After the acquisition, the first step would be the launch of a ‘mood
store’. The team at Jabong would offer a set of apparel, footwear, make-up and
accessories at these stores, instead of packing them under broad category heads
such as tops, kurtas and so on. Women, who make up 55 per cent of Jabong’s
clientele, are ensemble shoppers, data shows. They look for things that will look
good together instead of picking up a stray piece of clothing or a pair of shoes.
Mood, rather than need drives the fashion sale.

Jabong, which has a higher share of women users than Myntra, wanted to capitalise
on the mood store to attract a new set of users. They did not have any celebrities
(for the campaign) because Jabong is about ‘Be you’. It’s about an individual’s spirit
 and capturing the various moods. So we would see the same individual in three
different avatars. The same you, many moods.

 Increased user base:

Jabong has an active monthly user base of 4 million. Also, Jabong has strong
international brands and local sellers associated with it.

 Keep a check on competitors:

Flipkart has ensured with this deal to keep the ball rolling in its own court. Though,
the acquisition won’t help much with turnover but the competitors won’t get any
advantage. This is important considering both Amazon and Flipkart were vying for
Jabong.

With the addition of Jabong, they get a huge boost to their market share, access to a large
customer base, bigger team, and better territorial reach. Targeting the customers with the
right deal at right time has always been the secret recipe of Ecommerce successes. With their
years of operation, the Ecommerce giants like Flipkart, Amazon, Snapdeal, Myntra and Jabong
have access to massive amounts of shoppers’ data. This data is effectively being used for the
right targeting that creates higher profits. Most of this data is internal and derived from the
customers’ order history which could reveal a lot about them like gender, age, location,
preferred brands and much more. Customers actually benefit from right targeting as they get
deals relevant to them right into their inbox from time to time without having to take any
extra efforts of finding them. The merger of Flipkart, Myntra and Jabong will increase sales as
the data for various customer segments will be available to the company. The customer
targeting will improve which will lead to higher profits over a period of time.

Deal Attractiveness, Reasons for the Deal

At the end of 2013, the value of Jabong was as much as $508 million (about €388 million). In
the same financial year (ending March 2014), Jabong had reported a sale of Rs 438 crore.
Although the sales witnessed by Jabong increased to Rs 869 crore in the next financial year,
the value of Jabong collapsed due to a combination of a funding crunch, market share losses,
and leadership issues. The sales by Jabong marked one of the most dramatic declines in the
online retail business of India. For more over a year, Global Fashion Group (GFG) had been
looking for a buyer for Jabong. For this purpose, GFG held discussions with several firms
including Aditya Birla Group, Future Group, and Snapdeal.

Jabong, owned by Global Fashion Group was a collaboration between Jabong investors Rocket
Internet and Swedish investment bank AB Kinnevik. It had been in trouble for quite a while.
Despite GFG raising millions in the last one year, Jabong was facing severe fund crunch.
Jabong has also been working on restructuring the business since Sanjeev Mohanty
joined, starting with hiring the top leadership team. More recently, there had been structural
changes too. Jade Services, the B2B entity that owned Jabong, ran a B2C arm – Xerion Retail
– which sold about 90 percent of retail till a few days ago. On the other hand, Jabong was
shifting from its inventory-led model to a marketplace model to comply with rules on foreign
direct investment (FDI). Xerion Retail has been replaced by three vendors- Bren Trading Pvt.
Ltd, Ravenna Fashion Pvt. Ltd and Wearhouse Products Pvt. Ltd. All these developments took
place at a time when a PricewaterhouseCoopers investigation commissioned by Rocket
Internet had found anomalies in the functioning of Jabong’s logistics arm GoJavas.

The reason behind Flipkart’s Myntra acquiring Jabong was that it will boost sales at a time
when Flipkart was facing difficulty in reviving its growth. Also, Flipkart struggled to protect its
top position in a market where Amazon is making rapid growth. On the other hand, Flipkart
too had a tough year – with double devaluation, top leadership leaving, and tiffs with sellers.
Reports had been echoing the possibility that the global giant Amazon might just overtake
them as the largest marketplace in the country. Flipkart also did not have an upper hand in
one very important category – fashion. Therefore, the acquisition of Jabong was a move to
preserve its position as India’s No.1 e-commerce marketplace in the face of an onslaught by
Amazon India.

Jabong offered over 1,500 international high-street brands, designer labels, Indian ethnic,
sports labels and more than 150,000 styles from over 1000 sellers. Some of the international
brands and labels available on Jabong included Lacoste, Timberland, Swarovski, Forever 21,
The North Face, Bugatti Shoes, G Star Raw, Tom Tailor, Topshop, and Dorothy Perkins. Jabong
had also built a strong brand that was synonymous with fashion, a loyal customer base and a
unique selection with exclusive global brands.

Deal Financials including Valuation

Jabong was a very cheap purchase for Myntra. The deal cost $70 million (Rs470 crore) for a
company that was valued at around $1.2 billion just two years ago. The low value came about
after Jabong, once Myntra’s close rival, lost the race due to constant leadership churn and a
cash crunch over the past two years.

 At the end of 2013, Jabong was worth as much as €388 Mn (about $508 Mn).

 Jabong’s revenue was higher than Myntra in 2014-15, but both amassed massive
losses due to discounting.

 In late 2014, Jabong was seeking a valuation of around $1.2 billion when it was in talks
with Amazon, which failed over a valuation mismatch.

 Jabong was the only loss-making outfit in backers Global Fashion Group (GFG)’s
portfolio of ten companies in the January-June 2015 period.

 Jabong also registered slowest revenue growth of 26.5% y-o-y in the six months to
June, 2015 among the ten companies. It reported an operating loss of INR 426 Cr in
FY15, slightly lower than in FY14.

 In the buyout talks in 2016 Jabong was looking for a $250 Mn and may have settled
for even less.

 However, in 2016 Jabong’s value collapsed because of a combination of leadership

issues, market share losses and a funding crunch.
All the above factors lead to a lower valuation of the Jabong, thereby acquiring the company
and also helped Flipkart (Myntra) becomes the undisputed market leader of fashion and
lifestyle segment with 60-70% market share!

Synergy in the Deal:

Post the acquisition, discounts on Jabong were slashed by two-three percentage points,
making the company's unit economics positive. This led to 50% month-on-month growth
in revenues during the month of October (roughly three months after the acquisition), closing
the month with positive unit economics for the first time in its history.

The selection of products was made a bit better by cutting out the lower edge items that were
not doing well. Jabong is very strong in women and in international brands like Forever 21,
Dorothy Perkins, Next, etc. to which Myntra users, too, now had access.

Myntra, on the other hand, has great strength in terms of in-house brands like Mast and
Harbour, Dressberry, Roadster, etc. The introduction of these in-house brands on Jabong
made way for higher margins capture and made way for better results

A collective customer base of about 15 million visitors every month, boosted the alliance’s
gross merchandise value (GMV, or the total value of inventory sold) of about Rs 10,000 crore
a year.

The two hold about 60-70 per cent share of the branded apparel market online and along
with parent company Flipkart, the group was able to enjoy more than 75 per cent of India’s
total fashion ecommerce traffic.

The two portals brought together their back-end operations and supply chain for stronger
integration. Jabong also gained access to access to Myntra Logistics and Ekart for logistics,
thus, improving the operational efficiency. They also started inter-operability in technology.

Also, geographically, Jabong is probably stronger in the NCR region and that is something that
has been leveraged by Myntra.
Currently, Jabong drives close to a third of Myntra's revenues and serves a large base of users
that do not shop on Myntra. The overlap of customers between the two platforms is just 30%.

Thus, the alliance led to positive synergies in terms of greater pricing power, improved GVM,
reduced operational costs, improved market share, growth in new markets and improved
product lines.

Sectoral conditions Post-Deal:

Post the acquisition, Myntra- Jabong collectively received about 15 million visitors every
month. This led to the duo holding 60% - 70% share of the branded apparel market online,
placing the combined entity right at the top of pile. Along with the parent company Flipkart,
the groups started receiving more than 75% of India’s total fashion e-commerce traffic.
For Flipkart, the acquisition provided an opportunity for it to consolidate its position in the
high-margin fashion category while also keeping the likes of brick-and mortar retailers such
as Reliance Retail, Aditya Birla and Tata Group at bay.

In a scenario where 80-90 per cent of sales of premier global brands was happening from one
entity which controlled all three portals, many of the global as well as Indian premier fashion
companies became concerned that the ecommerce giant may use its market dominance to
dictate terms and demand higher margins. These brands feared that arm-twisting them into
giving more margins and on the other hand raising the prices for the consumers (in order to
make their business viable) would be unfavourable for the brands.
However, a Myntra spokesperson addressed these concerns saying that their goal was not
margins, but growth. He also said that relationship with brands is absolutely paramount and
critical to business.

Earlier, there were too much discounting and fighting happening and too much money was
being burned. Reduction in heavy discounting would now allow the company to use that
money in creating value for consumers, efficiency improvement, etc.
However, e-commerce companies like Limeroad, Voonik, Craftsvilla had a remarkably relaxed
demeanour about the deal. They saw this acquisition as less of a threat and more an
opportunity because they believed that India’s online fashion market has far more depth than
is being considered. According to one of these companies, India’s apparel and lifestyle market
is a $70-billion industry, and 2% of that is currently online, which meant that there still is a
long way to go.
According to them, there are multiple sub-markets in fashion where the value and mid-priced
segments command 75% of the market, with the remaining split between the premium and
luxury segments. Myntra and Jabong don’t have a play in the value and mid-priced segments.
Therefore, they did not see the deal making much of a difference to them. They felt that it
would be so-called ‘horizontal’ ecommerce companies like Amazon and Snapdeal that would
feel the pressure more.

According to a senior business analyst, smaller marketplaces like LimeRoad and Voonik have
a differentiated play and the Myntra-Jabong deal is unlikely to change their market shares
much.

Legalities and any legal issues associated:

There were several speculations in the market about e-tailer Myntra’s acquisition of Jabong
being accepted by the Competition Commission of India (CCI), the country's antitrust
regulator. If the acquired entity has an asset base of less than Rs 350 crore or turnover of less
than Rs 1,000 crore, the acquisition of such an entity is exempt from Section 5 of the Act for
five years from the date of notification.

A former head of merger control at the CCI, said that since Jabong’s asset base and turnover
were lower than the requisite thresholds, CCI scrutiny is unlikely to be triggered.

Another lawyer who heads competition law practice, however said that while deciding on the
issue of CCI scrutiny, the total assets and turnover of the combined entity would have to be
considered. The total sales and assets of Flipkart, Myntra and Jabong would have to be taken
into account. The orders passed by the commission have not differentiated between fashion
and non-fashion. For them, the entire market is retail, whether brick and mortar or online and
have not taken online commerce as a separate market.

According to the CCI’s combination laws, if the total assets of the combined entity in India
exceed Rs 2,000 crore or their total annual turnover is more than Rs 6,000 crore, it would
trigger a scrutiny. Although the combined entity will have a 70% market share in the online
apparel shopping segment, its overall share of the market (including physical stores) will be
significantly smaller.

Another competition head at a law firm, said the deal will need the CCI's permission but
getting clearance will not be a concern as the combined market share of Myntra and Jabong
will be very less when compared with brick-and-mortar companies.

According to another expert, acquisition of Jabong does not mandate any regulatory
intervention at the time of the deal as it not likely to have any serious competitive impact as
there are many other players in the market.

Resulting entity performance Post-deal

Flipkart owned Myntra purchased Jabong in July 2016. Subsequently, Myntra planned
to combine its revenues with Jabong to ensure quicker growth.

Jabong retained its individuality despite the takeover, and had its own sale idea during the
festive sale of 2016. While Flipkart held its annual Big Billion Days sale, Jabong launched ‘You
are the festival’, a few days after the big names concluded their first round of sales.
Encouraging shoppers to ‘Be you’, the company launched an extensive ad campaign to
popularise the sale. As a result, Jabong witnessed the highest ever net revenue this year on
weekdays and the average order value increased by 10%, while the app installations increased
by 40%.

Sales of Flipkart in October were boosted by these festive sales during which it said it sold a
total of 15.5 million items across its three platforms. The company claimed to be the largest
player in India's high-margin online fashion space.
Jabong saw a 50% month-on-month growth in revenues during the month of October, closing
the month with positive unit economics for the first time in its history.
Introduction of some Myntra brands on Jabong made way for higher margins capture and
made way for better results. The older customers of Jabong also started returning.

By November 2016, Jabong was driving close to a third of Myntra's revenues and was serving
a large base of users that did not shop on Mynta. The overlap of customers between the two
platforms is just 30%, something that had been estimated to be higher at the time of
acquisition.

By March 2018, Flipkart-owned fashion retailer Myntra was looking forward to increase
differentiation between the two brands in order to win new customers. Myntra was planning
to continue to focus on the mass premium fashion segment where it has emerged as the
leader, while Jabong would begin to focus more on luxury brands, global brands and the
premium fashion segment. The move to differentiate Myntra and Jabong came despite the
customer overlap between the two platforms being just 28 per cent. Even after 18 months of
the acquisition, customers of Jabong continued to be largely different from those on Myntra,
with just a two percent increase in overlap.
Both Myntra and Jabong, as on March 2018, had a combined base of 12 million customers, a
small subset of the 100 million customers claimed by parent Flipkart.

Myntra continued to drive the group’s push into offline fashion retail, opening its first offline
store for its in-house brand Roadster in Bengaluru and also running stores for Barcelona-
based fashion brand Mango in India. This focus on in-house brands along with partnerships
with global brands is driving Myntra’s margins up. The company had said it will become
profitable at an EBITDA level by March 2018, with its private label business which accounts
for about a quarter of its overall revenues, turning profitable sometime last year.
However, while the company might break even operationally, it will take some time to turn
profitable on a net basis.

During the four-day flagship sale that concluded in June 2018, Flipkart-owned Myntra
and Jabong added five lakh new customers to its platform, according to the company.
The company claims that the eighth edition of their End of Reason Sale (EORS) has been the
biggest sale till date for Myntra and Jabong, recording 47% year-on-year growth and 8x
growth over regular business days

This was achieved on the back of services like early access (where a customer could pay Rs
199 and have access to the selection prior to the sale), which added 1.2 lakh customers; a
referral programme and an expanded catalogue of products. Amazon and Flipkart organised
similar sales around the same time

Industry experts estimate that Myntra’s (including Jabong) sale outpaced the numbers of
Amazon Fashion’s sale and Flipkart Fashion’s sale, where Myntra plus Jabong clocked about
Rs 500-550 crore in gross merchandise value (GMV), while Amazon Fashion and Flipkart
Fashion clocked Rs 80-100 crore and Rs 120-150 crore, respectively.

WALMART-FLIPKART
1. Sectoral conditions Pre-Deal

The e-commerce has transformed the way business is done in India. The Indian e-commerce
market is expected to grow to US$ 200 billion by 2026 from US$ 38.5 billion as of 2017. The
value of e-commerce market is expected to cross US$ 50 billion by 2018.
Much growth of the industry has been triggered by increasing internet and smartphone
penetration. The ongoing digital transformation in the country is expected to increase India’s
total internet user base to 829 million by 2021 (59 per cent of total population), from 373
million (28 per cent of population) in 2016, while total number of networked devices in the
country are expected to grow to two billion by 2021, from 1.4 billion in 2016.

Market Size
Total online spending, inclusive of domestic and cross border shopping, is expected to
increase by 31 per cent year-on-year to Rs 8.76 trillion (US$ 135.8 billion) by 2018. Cross
border shopping by Indians touched Rs 58,370 crore (US$ 9.1 billion) in 2016, and is expected
to by 85 per cent year-on-year in 2017. The top 3 countries preferred by Indians for cross-
border shopping in 2016 were USA (14%), UK (6%) and China (5%).
The Indian consumer internet market is expected to grow by 44 per cent year-on-year to
touch US$ 65 billion in 2017, up from US$ 45 billion in 2016. Online travel agents account for
the largest market share (70 per cent) in the internet consumer market, while the remaining
30 per cent is occupied by horizontal e-tailing, fashion, furniture, grocery, hotel, food tech,
cab aggregators, education technology, and alternative lending among others.
The internet industry in India is likely to double to reach US$ 250 billion by 2020, growing to
7.5 per cent of Gross Domestic Product (GDP), with the number of mobile internet users
growing to about 650 million and that of high-speed internet users reaching 550 million.5
About 70 per cent of the total automobile sales in India, worth US$ 40 billion, are expected
to be digitally influenced by 2020 as against US$ 18 billion in 2016.

Government initiatives
Since 2014, the Government of India has announced various initiatives namely, Digital India,
Make in India, Start-up India, Skill India and Innovation Fund. The timely and effective
implementation of such programs will likely support the e-commerce growth in the country.
Some of the major initiatives taken by the government to promote the e-commerce sector in
India are as follows:

 Reserve Bank of India (RBI) has decided to allow "inter-operability" among Prepaid
Payment Instruments (PPIs) such as digital wallets, prepaid cash coupons and prepaid
telephone top-up cards.
 Finance Minister Mr Arun Jaitley has proposed various measures to quicken India's
transition to a cashless economy, including a ban on cash transactions over Rs 300,000
(US$ 4,655.1), tax incentives for creation of a cashless infrastructure, promoting
greater usage of non-cash modes of payments, and making Aadhaar-based payments
more widespread.

As of May 2018, Flipkart shares approximately 45% of market share. And it is leading player
in phone and Fashion segment. However, Flipkart has lost market share to Amazon in metros,
where amazon is the leading player.

Investors:
 Japan’s SoftBank Group Corp. owns a fifth of Flipkart through its Vision Fund.
SoftBank expected to sell its whole stake in the Walmart deal, Reuters reported last
week
 Early investors New York-based hedge fund Tiger Global and US private-equity firm
Accel Partners will sell a majority of their stakes, Reuters reported on Tuesday.
 Other investors include the founders and Napsers Ltd, China’s Tencent Holdings Ltd,
eBay Inc, and Microsoft Corp.invested $1.4 billion last year.

 Financials, according to filings sourced by business intelligence platform paper.

 Flipkart Group’s consolidated loss attributable to owners of the company in fiscal

2017 widened to Rs8,770 crore, from Rs5,216 crore a year earlier.

 Consolidated revenue jumped 29% to Rs19,855 crore in fiscal 2017.

2. Features of Buying and Target Company including Business details,
products, services, financials, HR policies, any other competitive features,
etc.
Flipkart’s business model of funding discounts to customers—using investor money—is
evidently new territory for Walmart, and it remains to be seen where things settle at after the
two cultures clash.
The features of the deal are as follows-
MAJORITY STAKE: Walmart will pay $16 billion for an initial stake of 77 per cent in Flipkart,
valuing the e-retailer close to $20 billion. The remainder of the business will be held by some
of Flipkart's existing shareholders, including Flipkart co-founder Binny Bansal, Tencent
Holdings Limited, Tiger Global Management LLC and Microsoft Corp. Walmart's investment
includes $2 billion of new equity funding, which will help Flipkart accelerate growth in the
future.

AIM TO BECOME PUBLICLY-LISTED: The new Walmart-owned entity's immediate focus will
be on serving customers and growing the business. The company will also aim to transition
into a publicly-listed, majority-owned subsidiary in the future.

E-COM TO GROW FOUR TIMES: Walmart expects India's e-commerce market to grow at four
times the rate of overall retail, and with well-known platforms such as Myntra, Jabong and
PhonePe, Flipkart is uniquely positioned to leverage its integrated ecosystem, said Walmart.

WIN-WIN FOR BOTH FIRMS: The deal is a win-win for both the companies. Flipkart's supply
chain arm, eKart, serves more than 800 cities, making 500,000 deliveries daily. In the fiscal
year ended March 31, Flipkart recorded GMV of $7.5 billion and the net sales of $4.6 billion
representing more than 50 per cent year-over-year growth in both cases.

BEST PRICE TO MAINTAIN DISTINCT BRANDS: The new entity and Best Price will maintain
distinct brands and operating structures. Krish Iyer, president and chief executive officer of
Walmart India, will continue to be the head of its business through Best Price stores. Walmart
India operates 21 Best Price cash-and-carry stores, with more than 95 per cent of sourcing
coming from India, aiding suppliers, creating skilled jobs and contributing to local economies
across the country.

NEW BOARD ANNOUNCEMENT SOON: The final make-up of the board has yet to be
determined, but it will also include independent members. The board will work to maintain
Flipkart's core values and entrepreneurial spirit, while ensuring it has strategic and
competitive advantages.

BIG 'MAKE IN INDIA' PUSH: Walmart said it supports small business and 'Make in India'
through direct procurement as well as increased opportunities for exports through global
sourcing and e-commerce. The company aims to partner with kirana owners and members to
help modernise retail practices and adopt digital payment technologies.

LOCAL OUTSOURCING, BETTER LOGISTICS: The company says it would support farmers and
develop supply chains through local sourcing and improved market access. It primary focus
would also be on reduced food waste by improving waste management practices and
investing in supply chains, especially cold storage.

MAJOR PLAYER IN INDIAN MARKET: The Flipkart investment transforms Walmart's position
in a country with more than 1.3 billion people, strong GDP growth, a growing middle class and
significant runway for smartphone, internet and e-commerce penetration.

3. Deal Attractiveness, Reasons for the Deal

Walmart has been looking to get into the Indian retail market for more than 15 years but the
regulation of not allowing foreign direct investment (FDI) into multi-brand retail has made it
impossible for Walmart to access the Indian market. Walmart tried to enter via a wholesale
model with Bharti in India but failed. Now they see online as the only method to enter the
Indian market, which leaves Flipkart as the best investment option for Walmart.

Strategic Advantage:
Flipkart leads in the fashion vertical. Its subsidiaries Myntra and Jabong are completely
focused on that industry. Flipkart also leads in mobile phones, which accounts for a significant
portion of its total GSV.

So what does Flipkart bring to the table for Walmart (apart from tailwinds about India’s macro
story and retail potential, which has been beaten to death)? The implications of gaining
leadership in the fashion vertical are that Flipkart has higher bargaining power with suppliers,
especially fashion brands. Myntra and Jabong (both owned by Flipkart) are positioned as
fashion destinations and not commodity retail destinations. Just this difference in perception
automatically means a difference in pricing power.

Fashion prices are not easy to compare across websites, and therefore a price premium can
be charged once a consumer starts browsing. For example, what is easier to compare — the
price of a Sony Bravia 42-inch television or a sky-blue Arrow full sleeve shirt, size 42 with a
specific stripes pattern? Moreover, given the price points, a consumer’s incentive to compare
is also lower than in the electronics segment. Hence, fashion is a goldmine from a P&L
perspective.

Moreover, the retailer is stuck with unsold inventory. (Branded fashion deals are usually not
done on a marketplace model and there is some level of retailer risk involved.) This imposes
a spoilage risk as well as the possibility that unsold inventory may have to be liquidated at a
loss. Overall, the Flipkart fashion vertical seems to be doing well, with reports of Myntra
looking to break even this year, while maintaining a healthy growth trajectory. Hence, risk of
loss due to unsold inventory reduces a lot.

Flipkart’s lead in the mobile market also has significant implications. For one thing, mobile
phones are highly amenable to online purchase through e-commerce platforms. They are high
value, have high demand, are not bulky and perhaps cost Rs 40 (or $0.75) to ship. Moreover,
a consumer who wants to compare multiple models side by side in peace may take two or
three visits before making up his mind (and hence would hate pushy salespeople in a physical
store). For these reasons, mobile phones were one of the first few items to show significant
traction on e-commerce and take significant share from offline retail. Even today, most
searches in e-commerce are about mobile phones, which are a significant symbol of identity,
especially for Indian youth.

Flipkart is a leading destination for phones in India — be it the deals it has with Motorola or
Xiaomi (which Amazon has slowly tried to wrestle into), or just the sheer number of exclusive
launches it does in a year. It is now an indispensable site for manufacturers to list their
phones. And with the high volume comes high bargaining power on margins. In addition, a
lead in mobile phones market share automatically means an entry into a high-turnover
segment with further scope to gain share versus offline retail.

Advantage which this deal brings to Flipkart is that, Flipkart will be able to move from its
heavy discount led model to cost reduction model.

This is a wake-up call for Indian traditional industrialists. It took a Tiger and SoftBank to see
opportunity and build value. Many Indian conglomerates have been around for hundred years
and know the India market well. But they were on the sidelines. If they had invested some
money a few years ago, they would have made massive returns today. Hopefully greed will
motivate them to action now.”

Walmart’s Amazon problem Walmart’s total revenue for the last fiscal was over $500 billion,
while Amazon’s net sales were $177.9 billion. Walmart showed net income of over $20 billion,
while Amazon’s net income was $3 billion. Yet, Amazon today is among the top five
companies in the world in terms of market capitalisation at over $680 billion market cap. In
fact, for a brief time this year Amazon was the second most valuable company in the world,
behind Apple. Analysts have also begun predicting that Amazon could beat Apple to become
the first company in the world with a $1 trillion market capitalisation. Walmart’s market cap
on the other hand is at just over $250 billion, not small change at all, but smaller than
Amazon’s. The reason for the stock markets in the US putting greater value in Amazon than
Walmart is because the former is seen as the company with a more robust future and growth
potential. Ecommerce accounted for 13 percent of total retail sales in the US in 2017 and 49
percent of growth, and Amazon is responsible for most of the growth. Overall ecommerce in
the US grew at 16 percent last year. According to ecommerce business intelligence firm
Internet Retailer, Amazon accounted for over 70 percent of the $62.47 billion growth in US
online retail in 2017 and almost 35 percent of the $127 billion rise in the overall retail
market.Walmart has spent the last few years playing catch-up in ecommerce. It spent $3.3
billion in late 2016 to acquire Jet.com, a direct competitor of Amazon. Last fiscal, Walmart
had ecommerce sales of $11.5 billion, a growth of 44 percent. However, in the last quarter,
ecommerce sales grew at only 23 percent, much slower than Amazon.

In the US, Walmart is the only formidable competitor left for Amazon. Walmart has been
growing its ecommerce operations a lot and Amazon has been increasing its footprint with
physical stores. It’s natural for that battle to spill into international turf as well.

Despite the potential for growth in online retail within US, Amazon has already made big
strides in international markets. This is because the expectation is that emerging markets of
today will become growth drivers of the future. China’s Alibaba, for instance, is valued at over
$520 billion, and most US tech and ecommerce companies either missed the China bus or
were kicked out.

India is the only big ecommerce market still up for grabs. India’s online retail market grew at
23 percent in 2017. While India’s overall retail market is over $670 billion in size, online sales
is just at $20 billion. The headroom for growth is immense, with 60 percent growth expected
this year.

Amazon is already in a strong position in India with a market share of around 35 percent,
compared to Flipkart Group’s 45 percent. If Amazon extends this lead in India or builds an
unassailable position, the company will be able to extend its overall lead over Walmart
dramatically.

Walmart’s India problem Walmart has been in India for over a decade, but hasn’t managed
to grab any share of the retail market. This is primarily because of the country’s FDI rules in
multi-brand retail. In 2011, India allowed 51 percent FDI in multi-brand retail, but allows 100
percent FDI in the wholesale segment. Walmart had a partnership with Bharti Enterprises, but
that never scaled up and the partnership ended in 2013. Walmart still operates 21 Best Price
wholesale stores in India, but has no presence in retail. Walmart has consistently missed the
bus. They are an iconic brand, have the cash and the market cap, but have let others dominate
the market, especially in markets other than the US. Unless they do something drastic they
will lose India too. They should have done something like this (an investment into Flipkart) at
least four years ago, but it is better late than never. It is a desperate situation for them

Walmart now realises that an offline-only play might not happen in India. They have been
trying to enter the India market for 10 years now and have realised that it is difficult for any
government to allow Walmart in India. Their experience with offline partners in India wasn’t
great. That’s why they are looking at a controlling stake in Flipkart. Their experience as
minority partner hasn’t been good.

As mentioned earlier, India is the last large ecommerce market that is still in its early stages
of growth. Walmart needs to carve a space for itself here before it is too late. What better
way to do that than by getting a pie of the online retail market leader?

Exit for Flipkart investors Flipkart has become the too-big-to-fail company for the Indian
startup ecosystem. It has raised over $6 billion from investors like Tiger Global, Accel Partners,
SoftBank, Tencent, eBay, and Microsoft. When SoftBank invested in Flipkart, Tiger got a $424
million exit while Accel got over $110 million. But investors will expect a blockbuster exit from
the company.“A strategic investor always has a different equation than a pure financial
investor. A strategic investor eventually wants control and a buyout. Tiger, SoftBank, and
others will look at IRR. Walmart will not look at just IRR. For financial investors this is the only
decent chance to sell their stakes and get returns. With Walmart as an investor, the risk is
lower and the value will go up. Flipkart will be in stronger position,” Ganesh says.This is an
important point as availability of funds is no longer of great concern for Flipkart, considering
it has deep-pocketed investors in SoftBank, Tencent and Microsoft among others. But a
strategic investor ensures that financial investors see an end.

4. Deal Financials including Valuation / Expected post-deal

financials(secondary data)
Flipkart’s financials will be reported as part of Walmart’s International business segment.
Assuming the transaction closes at the end of the second quarter of this fiscal year, Walmart
expects a negative impact to FY19 EPS of approximately $0.25 to $0.30, which includes
incremental interest expense related to the investment. In FY20, as we look to accelerate
growth in this important market, Walmart anticipates an EPS headwind in total of around
$0.60 per share due to Operating losses of approximately $0.40 to $0.45 per share, assuming
minimal tax benefit for the losses in the near to midterm. This amount includes about $0.05
per share related to amortization of intangible assets and depreciation of short lived assets
resulting from purchase accounting, which will only last for a few years post-closing and
Interest expense of approximately $0.15 per share.
 Walmart - Revenue growth Vs Operating Margin
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
1981-1990 1991-2000 2001-2010 2011-2017
Revenue Growth rate 35.00% 19.56% 8.19% 2.49%
Operating Margin 7.52% 5.89% 5.86% 5.32%

Revenue Growth rate Operating Margin

Flipkart Pricing history

25000
Capital raised/Post money valuation

20000

15000

10000

5000

0
Oct- Jun- Jun- Aug- Jun- May Jul- Dec- Jul- 201 201 201 Apr- Jun- Aug- May
09 10 11 12 13 -14 14 14 15 6 6 6 17 17 17 -18
Capital raised 1 10 20 150 360 210 1000 700 700 0 0 0 1400 71 250016000
Post-money valuation 10 800 800 1000 1600 2600 700011000155001100011500560011600116001250020800

Capital raised Post-money valuation

As Flipkart is expected to generate meaningful losses for at least the next few years.
Walmart is clearly looking for long term investment.
5. Synergies

 Walmart’s India business has been sub-scale, with annual revenue of $0.5 billion
versus $500 billion global revenue. Flipkart will offer scale to Walmart’s India
operations. To scale up the business and achieve the next leg of growth, Walmart and
Flipkart plan to support 5-6 million kirana (small mom-and-pop) stores through
modernisation of retail practices.

 Walmart have not been successful in Ecommerce and efficient use technology. With
Flipkart core business involve ecommerce and use of technology. Walmart can
leverage on flipkart’s technology to increase its footprint various market world wide .

 Access to huge Indian unpenetrated market.

6. Sectoral conditions Post-Deal

Majority of analysts predict three possible scenarios in e-commerce sector with some
permutations and combinations after Walmart-Flipkart acquisition is announced. These
are:

 Alibaba and Softbank group to carve out their own ecosystem and the formation of a
third front.

 Two big players (Flipkart and Amazon) will exist simultaneously with multiple niche
vertical players like Big Basket, First Cry, etc.

 Reliance Industries to stay on its own, while Future Group may align with another
online player to establish its presence in the online market.

Situation 1: Softbank, Alibaba join hands

After the Walmart deal, Flipkart and Amazon may not see any challengers until Softbank and
Alibaba decide to create a third front. The Flipkart-Walmart deal has left the Indian
ecommerce ecosystem seeing two large rivals (Flipkart and Amazon) taking a large chunk of
market share, with a small chunk left for the others.

The deal has led to apprehension among traders and smaller players who have approached
the Competition Commission of India (CCI), stating that the deal will create unfair competition
and an uneven playing field for domestic players. The deal seems to threaten smaller players
who think that the clash of titans - Amazon and Walmart - has reached Indian shores and will
destroy smaller players on the margins. In this situation, any third player/front will come as a
respite to the apprehensive stakeholders in the ecosystem.

Analysts believe that with Softbank out of Flipkart, there is a possibility of the Japan-based
telecom and internet major and China’s Alibaba to rally around and create the third front,
making the Indian ecommerce sector more competitive. However, experts say this may not
happen immediately as both firms would like to wait and watch the market before planning
any such consolidation move. The most noteworthy point is that Alibaba now has Softbank
on its side in its fight against Flipkart and Amazon.

Situation 2: Mutual coexistence

In this scenario, the two big players - Flipkart and Amazon - will exist simultaneously with
multiple niche vertical players like Big Basket, First Cry, Urban Ladder, etc.

Arvind Singhal, Chairman, Technopak, said that there are two large players in the online retail
space – Amazon and Flipkart. He added that the option of Softbank and Alibaba coming
together is available to them now, but they might not do it. He noted down a major point that
if you look at pure ecommerce, the market is very small. Maybe after three to four years,
when markets would have expanded, they both can look at putting in more dollars. But they
won’t like to burn more dollars in India now as the market is small. He believed that they will
be in a wait-and-watch mode as far as ecommerce is concerned.
Singhal further added that as far as leftover market space is concerned, there could be single
vertical players in the space of grocery, furniture, baby products, and others capturing the
space. So he concludes that there are opportunities for niche players that can continue to
grow, because not everyone will buy from these two players.

Situation 3: Entry of new giants

The third scenario that can emerge and shape the online market is the possibility of Future
Group and Reliance Jio (including Reliance Retail) expanding their online business.

Reliance is in retail and in telecom. Reliance Smart is the online grocery store from their
stable; they are already doing home delivery (with Reliance Smart) in some cities. They have
a fashion brand too, Reliance AJIO. The day Reliance decides to take ecommerce seriously,
both Amazon and Flipkart will get a formidable competitor. As far Future Group is concerned,
it might go with Amazon or Paytm to leverage the O2O (Online to offline) business. As the
group hasn’t made much money on the retail front, they would most likely collaborate with
either of these companies

Not everybody will fall by the wayside after this deal. Speciality retailers like Big Basket, Urban
Ladder, and First Cry will always be there, according to experts and analysts. Experts are of
the opinion that Amazon and Walmart have both failed in China, so why can’t they fail in India
too

Clearly, the Indian ecommerce market is not a done deal as yet. The incumbent e-tailers have
just managed to scratch the surface of the total retail market. The online retail market is less
than 3 percent of the total retail industry in India and research firm eMarketer has predicted
that Indians will spend $71.94 billion on ecommerce by 2021. So, the war to capture the
ecommerce market will continue.

7. Legalities and any legal issues associated

A month after signing the biggest e-commerce deal in the world, Walmart and Flipkart are
facing roadblocks that could drastically change the contours of the transaction. If the
Competition Commission of India (CCI) suggests structural changes in the Walmart-Flipkart
deal, as indicated by officials, there could be three options before the American retail giant,
sources said. One of the options for Walmart could be to not accept the structural changes
suggested by the fair trade regulator, and back out of the deal. The second option could be
to renegotiate the deal at a lower valuation. And the third could be challenging the CCI ruling
in the courts.

The CCI is the only regulatory nod that the deal would require and Walmart has told the US
Securities and Exchange Commission that everything will be completed by the end of the year.

Sources close to the company said that till now the only dialogue they had with the CCI was
about giving them basic information on the deal. The CCI has not sent the company any letter
with directions on restructuring the deal. They also claimed the stake buyout of Flipkart was
on track and the integration process was on.

In fact, no investor has exited yet. There are going to be multiple share purchase agreements
that will all be executed simultaneously once the deal concludes. ‘’At that point the shares
from Softbank, Tiger, Naspers, Sachin Bansal and a number of other investors in Flipkart will
be transferred to Walmart. So till that happens, nobody has exited. In other words, even if
the CCI verdict was to change the direction of the deal or block the transaction, nothing would
change materially as shares or money have not changed hands till now.

There is talk of asking Walmart to set up a fund to help support small retailers, he said.

To maintain equality, CCI should recommend to government to impose this on all parties
Indian and foreign as well as big format retailers. There is no logic in one company bearing
costs

The other hurdles

CCI is not the only hurdle that Walmart needs to cross. Traders’ associations representing
neighbourhood or mom and pop stores have been agitating aggressively too.
The Competition Commission of India (CCI) might also take cues from a ruling in South
Africa with respect to Walmart- Massmart deal, which was announced in 2010.

CCI might even recommend setting up of a long term fund to modernise kiranas going forward
besides supporting local manufacturing by SME (Small and Medium Enterprises).

The fund could work under the aegis of DIPP (Department of Industrial Policy and Promotion)
along with Walmart representatives to build a robust Kiranas development programme
wherein the US retailer provides knowledge and resources.

In the case of the deal between Walmart and South African entity Massmart, it was approved
by the Competition Commission of South Africa. However, it was challenged and later South
Africa's Competition Tribunal gave its approval in 2011 for the merger subject to conditions
proposed by the two companies.

The important point that is to be noted is that Walmart had accepted the conditions
proposed by the two companies.The conditions, included setting up of a R100 million supplier
development fund and no merger-related retrenchments for a period of two years.

8. Any other Issues During or After the deal

While the BJP led Union government has been opposed to foreign direct investment in multi-
brand retail, thereby keeping the like of Walmart out, the government has not shown any
resistance to the Walmart-Flipkart deal. But Praveen Khandelwal, the most vocal office bearer
of Confederation of All India Traders (CAIT) said the government did not have a direct role in
the Walmart-Flipkart deal. Khandelwal, secretary general of CAIT, said the association would
actively take up the matter with CCI, Reserve Bank of India and Enforcement Directorate.
Beyond competition issues, traders are protesting against what they call an ‘’unethical deal’’.

But the irony is that Amazon is also operating in the same space. So the major issue here is
the expertise of Walmart in retail sector and supply chain. They are having a logical opinion
that it is a calculated move to enter Indian retail, something that it could not do via multi-
brand route.
In May, Walmart and Flipkart told CCI that the relevant market for their combination is in B2B
sales since Walmart does not have a presence in a consumer-facing business in India. The two
parties said that the "proposed transaction does not give rise to competition concerns” and
the "relevant market" for the partnership is the "pan-India market for B2B sales".

CAIT is demanding a formation of regulatory body for e-commerce sector. Khandelwal said
that if the Walmart-Flipkart deal goes through, they expect Walmart to manipulate and
overtake the retail trade of India by sourcing globally, thereby having a negative impact on
small traders.

Meanwhile, tax authorities are waiting as well to make their demands once there’s clarity on
the deal structure. Questions are already being posed to the investors.

Extension by Walmart for closing the deal

Walmart is giving itself more leeway to close the acquisition according to documents filed for
a mega bond issue to finance the transaction

Walmart has given itself time till June 7, 2019, to close the deal, failing which it will have to
repay a significant portion of the bond issue even as they remain confident of completing the
transaction before the end of 2018. March 31st 2019 deadline had been set in the share
purchase agreement between the two companies around which the termination rights have
been negotiated, as per a regulatory filing made in May

In June, Walmart kick-started the process of selling $16 billion worth of bonds to help finance
its investment in Flipkart, offering fixed and floating rate notes in nine parts.
However, Walmart maintains that the new deadline is in relation to the bonds issued to fund
the deal and it continues to expect to close the deal by the end of this year.