Flipkart-eBay potential merger: There is more to it than meets the eye

By Binu Paul

  • 24 Mar 2017
Flipkart-eBay potential merger: There is more to it than meets the eye
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Flipkart's likely acquisition of eBay's India arm has more to do with its eagerness to get the badly-needed capital than what the dormant e-commerce site, a distant sixth in the pecking order, would bring to the table in terms of business, say industry watchers.

Factor Daily had on Thursday reported that eBay was in talks to sell its laggard India unit to Flipkart as part of a deal that could see the US-based company inject $500 million into the drying coffers of India's top e-tailer. Clearly, the merger is a prerequisite than a business move, for Flipkart's turnaround is incumbent on its ability to keep the funding tap running.

“It’s not that Flipkart needs eBay; what it needs is the money. I’m not very sure if eBay can bring anything extra to the table because it couldn’t make much of an impact in India despite being here for such a long time. It could give them a graceful exit from India rather than shutting operations or withdrawing,” said Arvind Singhal, chairman at retail consultancy Technopak.


Clearly, eBay's annual revenues of Rs 392 crore are but a speck in the vast Indian e-commerce Indian market. It's not exactly an apple-to-apple comparison, but Flipkart generated gross sales of Rs 3,000 crore during last year’s Big Billion Day sale.

“eBay was not a big player in India, it just had a mere presence. The merger looks like a pre-condition for the fundraise. The backing and the funding is more significant here, not how eBay can contribute to Flipkart’s business,” Satish Meena, analyst at Forrester Research, said.

So, is that all there is to this potential deal? More on that later. First, a bit of history.


What really went wrong for eBay India?

eBay Inc. entered India with the acquisition of Bazee.com in 2004, much before Flipkart or Amazon started business.

Though a small company by marketplace revenues, eBay was making a net profit, albeit tiny, till as late as FY10. Data from VCCEdge, the data research platform of VCCircle, suggest that it posted a net profit of Rs 2.24 crore and Rs 2.17 crore in FY10 and FY09, respectively. However, the arrival of Flipkart and Snapdeal, which used hot VC money to extend deep discounts to customers, completely disrupted its business model.


Fast forward six years, eBay India reported a three-fold rise in revenue and a wider loss for financial year 2015-16. According to filings with the Registrar of Companies, losses stood at Rs 262 crore versus Rs 172 crore in the year-ago period. Revenues rose to Rs 392 crore in 2015-16 from Rs 132 crore in the previous financial year.

Singhal thinks there is a certain degree of complacency as far as eBay's India operations go. “See Amazon. Jeff Bezos has been traveling to India, making public statements about Amazon’s India aspirations. He has met the Prime Minister. Pierre Omidyar may have come to India many times...but I have not seen that sort of a commitment from eBay," he says.

He adds that being a startup backed by private capital, Flipkart has a certain amount of hunger when it comes to expanding business but that's not the case with eBay.


Meanwhile, in 2014, eBay led a $134-million funding round in Snapdeal, acquiring a significant minority stake in the e-commerce firm. Subsequently, it pared down its stake in a $500-million funding round that Snapdeal raised from Foxconn and Alibaba, among others, in 2015. Currently, eBay’s stake at the troubled e-commerce major is down to low single digits. As of March 2016, it held a 6% stake in Snapdeal.

In November 2016, eBay fired nearly 30% of its product and technology team at its Bengaluru development centre. The work done by these teams was transferred to other global locations, the company had said.

Latif Nathani, who was heading eBay’s India business up until recently, resigned from the company early this month. Last month, Ramkumar Narayanan, general manager and global head of monetisation products at eBay Marketplaces in India, had quit the company.


A face-saving exit

While the move will end eBay’s existence as a business in India, the decision to merge its India arm with Flipkart is a great business call given the current state of the e-commerce market and eBay's standing. Its pure-play marketplace model based on consumer-to-consumer transactions has clearly cut no ice with the price-sensitive Indian customer.

“eBay has realised that its model of pure-play marketplace doesn’t really work in India. The market here is not that mature in terms of sellers or buyers. To resurrect its India game, it would need a lot of investments and a total revamp of its model. The company has realised that it’s better to put money on Flipkart, the only company that can take on the increasing market pressure from Amazon,” Meena said.

But there is more to it. For eBay, it’s a strategic investment as well.

“These deals are not done with operating marketing budgets. When eBay puts money in Flipkart, the money is coming from the funds lying with its APAC units, which it cannot take back to the US without paying a huge amount in taxes. eBay is sitting with a lot of money outside the US. This is a balance sheet transaction they would do. eBay’s advantage is not just unloading a market-facing deal that would add an X amount of cost to them—it’s also to spend the money that they cannot take back to US,” a person close to the development said.

He added that eBay never had an intention to shut down India operations, but it did want to reduce its overall footprint here.

"At this stage of the game, to restructure eBay India is not very feasible. That’s why they decided to go for Flipkart. Yes, it’s a face-saving strategy, but it’s also a hard business decision. It’s a very cold-hearted decision to focus on a market that they primarily care about,” he added.

What’s Flipkart’s gain?

Flipkart showed some early signs of a reversal in fortunes when it outran rival Amazon India in gross sales for two consecutive months, after trouncing the US-based e-commerce company with its Big Billion Day sales in October. While many argue the deal offers nothing to Flipkart except the money, it looks like the Indian e-commerce bellwether stands to gain more than just a monetary lifeline.

“Apart from the funds, the most obvious advantage would be access to eBay’s global inventory. eBay has 25 million sellers globally, and has deep relationships with sellers from China. It would be a lot of work for Flipkart to build that relationship from scratch and gain access to sellers from China, Eastern Europe and US. They need to tap this opportunity if they are serious about competing with Amazon. How much they leverage this or the deal terms allows them to do so, I’m not sure,” the aforementioned person said.

The second advantage, the person said, would be on the logistics front. Although eBay doesn’t do warehousing, it has done a lot in terms of building a shipping platform and estimated delivery platform that allows it to manage seller-buyer relationships without handling logistics.

"I’m not sure if Flipkart would be interested in this given its heavy investments on eKart. However, it’s something that could be advantageous because it gives Flipkart access to an experience it does not have,” he said.

Impact on e-commerce market

The merger is unlikely to cause visible impact on the Indian e-commerce market, except the fund infusion gives Flipkart more firepower in its fight against Amazon.

The US-based company, which started operations in India in June 2013, has already invested $2 billion here. In June last year, founder and chief executive Jeff Bezos committed to spend another $3 billion in India, taking total investments in the country to $5 billion. On the other hand, Flipkart has raised around 3.6 billion so far, excluding the current round.

“eBay is not actually a mover or shaker in the market. Its exit or merger with Flipkart wouldn’t make much of an impact,” Singhal said.

The fresh funding for Flipkart comes nearly 19 months after the $700-million fundraise at its peak valuation $15.2 billion.

“Now, we have Amazon on one side and a combination of Chinese and US-based investors on the other. The future of e-commerce in India will largely depend on how Alibaba decides its game plan. Alibaba’s move on Paytm and Snapdeal can create a new structuring on the market. For smaller players, it’s going to be difficult,” Meena said.

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