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Why a potential Snapdeal-Paytm merger makes perfect sense

18 February, 2017

Will they? Won’t they? Rumours come and go, but those around India’s third-largest e-commerce company Snapdeal’s merger refuse to die down, even though the suitors keep changing. 

For instance, not too long ago, the Jasper Infotech Pvt. Ltd-run company was in the news for exploring a potential merger with India’s biggest e-commerce player Flipkart. This time around, it is reportedly in merger talks with Vijay Shekhar Sharma’s Paytm. 

About a month ago, certain media reports had said that One97 Communications Ltd-operated Paytm and Snapdeal had held exploratory talks to merge the two companies in an “all-stock transaction.” A report in The Economic Times had said, citing people privy to the development, that the deal may not happen now but there is a possibility that the talks could resume again. 

The potential merger, which will bring together the two loss-making ventures, looks likely more than ever for a host of reasons. The highest common factor in both companies is Chinese e-commerce giant Alibaba, which has made its India entry plans abundantly clear. In 2016, it said it was looking at opportunities to build the business organically or through other means. When One97 separated its e-commerce operations from the mobile payment and commerce business, it hinted at the possibility of Paytm E-commerce getting acquired by Alibaba.

Alibaba owns around 41% in Paytm E-commerce Pvt. Ltd and close to 3% in Snapdeal. Given the shareholding pattern, it is likely to merge all its local e-commerce investments to become a larger marketplace rather than invest in one (Paytm) and compete with the other (Snapdeal). Last month, there were reports that Paytm E-Commerce was set to raise $200-252 million (Rs 1,350-1,700 crore) in an investment round led by Alibaba. In addition, Snapdeal’s biggest investor SoftBank also has a substantial stake in Alibaba. 

Given so many common investors, chances are high that the merger, if it happens, will be an investor-driven one.

Even from a business point of view, it is difficult to naysay the benefits likely to accrue to Snadeal, Paytm as well as Alibaba.   

Efficiency boost

Both Snapdeal and Paytm are making huge losses. Losses at Snapdeal more than doubled to Rs 2,960 crore (around $436 million) for the financial year ended March 2016. Its consolidated loss widened to Rs 3,315 crore from Rs 1,328 crore in FY15. Paytm posted a net loss of Rs 1,548 crorein the financial year ended March 2016 on revenue of Rs 830 crore, and there is little likelihood that the tide will turn this year. Paytm’s financials combine both its payments wallet and e-commerce business.

Commenting on why a merger makes sense, Unicorn India Ventures managing partner Anil Joshi said, “The merger will have a positive impact on their operational efficiency. As both firms operate in the same domain, there would be some overlap of vendors, and duplication of warehousing (if involved) and IT infrastructure. A merger will bring down administrative costs and marketing expenses, boosting unit economics, which is needed how things are going. It might make sense to put more money in building a market for the merged entity instead of competing with each other.”

Funding crunch

Even though Paytm was lucky to raise funds last year in bits and pieces, a larger round is not in sight, despite all the rumours around Alibaba considering writing a big cheque. Snapdeal has been struggling, with funding pressure reaching such high levels that the company is seemingly ready to raise fundsfrom main investor SoftBank in a down round. Moreover, as the country’s third largest e-commerce player, diminishing cash reserves are making it tough for Snapdeal to compete with larger rivals Flipkart and Amazon, putting question marks around its survival.

In such times of cash crunch, a merger becomes ideal since it removes unwanted competition, said an industry observer on the condition of anonymity.

Consolidation

Last but not least, consolidation is the need of the hour not just for the two companies, but investors too.

“Consolidation is good from shareholders’ and investors’ perspective. In the travel-tech space, there were two big players (MakeMyTrip and ibibo)—both had money, the competing cost was high in forms of marketing discounts, etc. When they came together, all the madness came to an end,” said Mukul Singhal, co-founder of Pravega Ventures.

“With the merger, shareholder value-creation happened. From investors’ point of view, in India we need to see those kind of exits and value-creation processes. These companies have been in the market for pretty long and and if M&A brings some sanity and creates shareholder value, we should do it,” Singhal added.

Recently, Seedfund co-founder Mahesh Murthy, who is known for not mincing his words, had told Techcircle, “As for Flipkart, Snapdeal, Shopclues and the like, I do not believe they will be key players going forward in India. Each of them will either be bought up and/or dissolved in some consolidation or end game play in the next few years.”

A potential merger could be both Snapdeal and Paytm’s best bet against fading into the oblivion.

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Why a potential Snapdeal-Paytm merger makes perfect sense

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