After five months, countless man hours of deliberation and numerous board meetings, a proposed merger between e-commerce players Snapdeal and Flipkart – which would have been the biggest consolidation in the Indian e-commerce history has been called off, Snapdeal has confirmed.
“Snapdeal has been exploring strategic options over the past several months. The company has now decided to pursue an independent path and is terminating all strategic discussions as a result. Snapdeal’s vision has always been to create life-changing experiences for millions of buyers and sellers across India,” Snapdeal spokesperson said.
Sources added that Softbank would in all probability invest in Flipkart on its own and not continue its association with Snapdeal. The Snapdeal founders – Kunal Bahl and Rohit Bansal – as well as early-stage investor Nexus Venture Partner and smaller shareholders like PremjiInvest had all along showed their reservations against the deal.
A Softbank spokesperson said: “Supporting entrepreneurs and their vision and aspirations is at the heart of Masayoshi Son’s and SoftBank’s investment philosophy. As such, we respect the decision to pursue an independent strategy. We look forward to the results of the Snapdeal 2.0 strategy, and to remaining invested in the vibrant Indian e-commerce space.”
Snapdeal plans to now go ahead with its ‘Plan B’ and pivot its company into a Taobao kind of an open marketplace set-up. The company just closed a $60-million deal to sell its online wallet Freecharge to Axis Bank. With this money, as well as the cash it has in bank, the company hopes to have a running time of at least four years.
“We have a new and compelling direction – Snapdeal 2.0 – that uniquely furthers this vision, and have made significant progress towards the ability to execute this by achieving a gross profit this month. In addition, with the sale of certain non-core assets, Snapdeal is expected to be financially self-sustainable. We look forward to the support of our community, including employees, sellers, buyers and other stakeholders in helping us create a designed-for-India commerce platform,” the person added.
According to sources there are a host of reasons behind the deal not happening. In his last email to FreeCharge employees as the top boss, Bahl, buoyed by the sale of the mobile wallet to Axis Bank, said the deal provides them the necessary boost in resources to continue the journey towards building an e-commerce platform.
Axis Bank last week announced it had bought the mobile payments wallet provider from Snapdeal for $60 million.
According to sources close to Snapdeal, the co-founders are actively working towards a ‘Plan B’ and have taken into confidence most of their senior management. According to sources, the two have been fighting SoftBank, the biggest investor in the company, ‘tooth and nail’ to prevent the deal from happening.
“They are going to fight the deal till they can. The kind of U-turn SoftBank took last year has left them flabbergasted. First SoftBank asked them to rebrand, spend money on marketing, promising all along that more investments are on way and then they suddenly left them high and dry. While Flipkart went through a series of markdowns, Snapdeal was untouched, but when it came to valuing the company for a merger, its valuation was slashed from $6.5 billion to less than a billion dollars,” said a source who till recently was part of the Snapdeal senior management.
Bahl along with Bansal and Jason Kothari, the current chief executive officer of FreeCharge, have been in talks with several other players in hopes of finding an alternative to Flipkart. Recently, the founders were having informal talks with business-to-business marketplace major Infibeam, though the talks have not moved forward.
If push comes to shove, the co-founders plan to bring down the number of employees from 1,000 to 200, run a lean organisation, and show profits by next year. It plans to go for an initial public offering post that and get an exit.
Till date, the co-founders as well as Snapdeal’s early-stage investors have been upset with the way SoftBank has marked the valuation to a sixth of what it was last year. Kalaari Capital and Nexus Venture Partners, the two early-stage investors, wanted SoftBank to value not just the e-commerce company, but its two units — Vulcan Express and Unicommerce — with a higher valuation.
Both Kalaari and Nexus had vetoed SoftBank’s proposal in April to value the e-commerce company between $600-800 million. SoftBank has already written off the value of its investments in the company.
In the months that followed, Kalaari’s founder Vani Kola resigned from the Snapdeal board and Nexus gave its assent to the valuation of a billion dollars. Flipkart earlier made an offer of $750 million, then revised it to $900 million. But the co-founders and Nexus played hardball. “The investors believe that Snapdeal is worth more and do not want to be shortchanged. They have to face their shareholders,” said a source close to the Snapdeal board.
Snapdeal’s minority shareholders, in total around 30 including PremjiInvest, have also showed their displeasure about the deal and demanded a better payout.
From indemnity to a non-compete clause, Flipkart had put forth a set of demands in front of the Snapdeal board that is making them as well as the shareholders of the Gurugram-based online marketplace ‘uncomfortable’, and leading to further delay.
“There are a lot of non-standard clauses that Flipkart wants the Snapdeal board to agree on. For example, the marketplace major wants indemnity for at least two years for any financial losses or other troubles that might happen after merger,” sources close to the Snapdeal board said.
It means Flipkart wants protection from all the decisions taken by the Snapdeal board that might have an effect on the company after merger for a period of two years. Snapdeal investors looking for an exit, such as Nexus and Kalaari, would remain tied up for a considerable amount of time.