MERGER AND ACQUISITION IN E-COMMERCE SECTOR

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1 Tactful Management Research Journal Vol. 2 Issue. 8 May 2014 ISSN : ORIGINAL ARTICLE Impact Factor : (UIF) MERGER AND ACQUISITION IN E-COMMERCE SECTOR Priyanka, Khushboo Sagar and Richa Verma Assistant Professor, Ramjas College, Universtiy Of Delhi. Assistant Professor, Shri Ram College Of Commerce, Universtiy Of Delhi. Assistant Professor, Ramjas College, Universtiy Of Delhi. Abstract: The main objective of this research paper is to analyse the market growth of e- commerce which attracts the merger and acquisition in India. Through this paper we will try to find out reasons of merger and acquisition from the experience of Indian e- commerce sector. Internet growth has led to a host of new developments, such as decreased margins for companies as consumers turn more and more to the internet to buy goods and demand the best prices.the industry is growing rapidly and there is still a huge potential for growth. "Likewise, the industry has grown exponentially over the last 11 months and will continue to see growth the increased competition in the global market has prompted the Indian companies to go for mergers and acquisitions as an important strategic choice. The sector is witnessing a swathe of consolidation owing to various mergers and acquisitions.however, industry experts believe this is just the start of the e- commerce wave in India. The growing penetration of technology facilitators such as Internet connections, broadband and third generation (3G) services, laptops, smart phones,tablets and dongles, coupled with increasing acceptance of the idea of virtual shopping, is set to drive the e-commerce eco-system. The e-commerce story in India would surely witness a new world of digitalisation in the coming decade,with a host of start-ups emerging to compete with existing players in order to draw benefits from the new and existing markets. KEYWORDS: MERGER And Acquisition, E-Commerce, acquisitions. INTRODUCTION In today's globalized scenario, competitiveness and competitive advantages have become the buzzwords for corporate around the world. Merger and Acquisition in the e-commerce sector have been on the rise in the recent past, both globally and in India. In this backdrop of emerging global and Indian trends in e-commerce sector, this study illuminates the key issues surrounding M & A in Merger and Acquisition with the focus on India. It also seeks to explain the motives behind some Merger and Acquisition that have occurred in India Mergers and Acquisitions is the only way for gaining competitive advantage domestically and internationally and as such the whole range of industries are looking to strategic acquisitions within India and abroad. In order to attain the economies of scale and also to combat the unhealthy competition within the sector besides emerging as a competitive force to reckon with in the International economy. Consolidation of Indian e-commerce sector through mergers and acquisitions on commercial considerations and business strategies is the essential pre-requisite. Today, e-commerce sector is counted among the rapidly growing industries in India.The business world is being gradually changed to an e- economy by the ever-increasing global competition, increased information availability, knowledgeable Priyanka, Khushboo Sagar and Richa Verma MERGER AND ACQUISITION IN E-COMMERCE SECTOR : Tactful Management Research Journal (May ; 2014)

2 consumers, changing relationships, rapid innovations, and increasingly complex products. In the last few years, there have been paradigm shift in Indian e-commerce sector. The Indian e-commerce sector is growing at an astonishing pace. A relatively new dimension in the Indian e-commerce sector is accelerated through mergers and acquisitions Mergers and acquisitions are a response to new technologies or market conditions that require a strategic change in a company's direction or use of resources. Compared to current management, a new owner is often better able to accomplish major change in the existing organizational structure. The rapid growth of e-commerce in India is being driven by greater customer choice and improved convenience. India has an internet user base of over 200million users as of rd largest internet population compared to markets like the US and the UK but is growing at a much faster rate with a large number of new entrants. The industry consensus is that growth is at an inflection point with key drivers of Increasing computer educational level, Increased Usage of Internet, Rising standards of living and high disposable incomes, Availability of a much wider product range (including online purchase from international retailers and direct imports) compared to what is available at brick and mortar retailers,busy lifestyles, easy to find product reviews, urban traffic congestion and lack of time for offline shopping, Lower prices compared to brick and mortar retail driven by disintermediation and reduced inventory and real estate, user experience, payment gateways & logistics etc. E-COMMERCE SECTOR HAVE BEEN CONSTANTLY INNOVATING To capitalise on the benefits offered by the unique Indian consumer base, ecommerce Companies have been innovating with policies traditionally not available in a brick-and-mortar store. Companies have introduced return policies ranging from 7 30 days, free home delivery and the most recent cash on delivery model. The last innovation has led to a lot of momentum in Internet sales and changed people's perception towards online shopping as shoppers can now purchase without disclosing their credit/debit card details. It is believed that more than 50.0 per cent of all online transactions in India are based on the cash on delivery (COD) payment methodology. The trend in the e-commerce segment is that most of the e-tailers start with a single product and later diversify their product portfolio with multiple offerings. Notably, the market leader Flipkart.com broadened its offerings with various products such as mobile phones, computers, movies, music, baby products and stationery from its initial set-up of selling books online Furthermore, Snapdeal.com, the second largest e-commerce company that began operations as an online group discounting site in 2010, got converted into a market place with thousands of products. OBJECTIVES OF THE STUDY To study the reasons for merger and acquisition in Indian e-commerce sector. To analyse the mergers and acquisition in e-commerce sector. To study the challenges faced by e-commerce sector in India. RESEARCH METHODOLOGY A comprehensive study has been undertaken for the e-commerce those have gone for M&A during the post-reform period. Data require for the research paper is collected from secondary sources. Following secondary sources have been used for data collection: digital-commerce IAMAI reports, books, websites, newspaper, journals that are involved in consolidation REASONS FOR MERGER AND ACQUISITION To Limit competition: Markets developed and became more competitive and because of this market share of all individual firms reduced so mergers and acquisition started. Utilise under-utilised market power The primary motivation for most mergers is to increase the value of the combined enterprise. Synergistic effects can arise from four sources: (1) operating economies, which result from economies of scale in management, marketing, production, or distribution; (2) financial economies, including lower transactions costs and better coverage by security analysts;(3) differential efficiency, which implies that the management of one firm is more efficient and that the weaker firm's assets will be more productive after the merger; and (4) increased market power due to reduced competition. Operating and financial economies are socially desirable, as are mergers that increase managerial efficiency ;but mergers that reduce 2

3 competition are socially undesirable and often illegal. Utilise under-utilised resources human and physical and managerial skills. Displace existing management. Create an image of aggressiveness and strategic opportunism, empire building and to amass vast economic powers of the company. Transfer of skill takes place between two organisation takes place which helps them to improve and become more competitive. Managers often cite diversification as a reason for mergers. They contend that diversification helps stabilize a firm's earnings and thus benefits its owners,to employees, suppliers, and customers. Financial economists like to think that business decisions are based only on economic considerations, especially maximization of firms' values. However, many business decisions are based more on managers' personal motivations than on economic analyses. Business leaders like power, and more power is attached to running a larger corporation than a smaller one. Obviously, no executive would admit that his or her ego was the primary reason behind a merger, but egos do play a prominent role in many mergers. Firm will be touted as an acquisition candidate because the cost of replacing its assets is considerably higher than its market value. Tax considerations have stimulated a number of mergers. For example, a profitable firm in the highest tax bracket could acquire a firm with large accumulated tax losses. These losses could then be turned into immediate tax savings rather than carried forward and used in the future. RECENT MERGER AND ACQUISITION IN INDIA 1.Flipkart buys out Myntra for $300 Million. Flipkart is a leader in selling multiple product categories online and Myntra is India's leading fashion retailer with strong brand recall. Their combined might also places them in a better position to take on the likes of Amazon, which has become increasingly aggressive in India's booming e-tailing market. Flipkart is into a number of categories, Myntra is focused on fashion e-tailing. With Myntra's share of 30% of online fashion sales, Flipkart now has a 50% share in a segment that's clocking nearly 100% annualized growth. With this deal, Flipkart effectively has stolen the thunder from Gurgaon-based Snapdeal, which was looking to be the first e-tailer in India to cross Rs 1,000 crore in fashion sales by the end of this year. As part of the acquisition, Myntra co-founder Mukesh Bansal will join Flipkart's board and will also oversee Flipkart's fashion business. Flipkart and Myntra will remain as two separate entities, but people holding stock options in Myntra will now hold the same in Flipkart. The current deal appears to be win-win for both companies, and could be the making of a giant company, better positioned to address India's growing demand for online retail - one that could put up strong competition against rivals.flipkart has announced it will invest $100 million in Myntra over the next 12 to 18 months, and it hopes to become the country's largest fashion entity. That is a big advantage for Myntra, which has raised $125 million so far, and will not have to worry about raising funds for further growth. The $130-million apparel e-retailing industry is growing fast. However, fashion is highly fragmented and under-penetrated.while Flipkart will bank on Myntra's fashion expertise and expanding its base of vendor brands (currently around 650), Myntra will leverage Flipkart's logistics network. Flipkart ships books to almost all of India's 21,000 PIN codes, and covers 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. 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 has big plans with its private brands like Anouk, Dress berry and Roadster, which promise margins as high 60 per cent. Myntra will continue to operate as a separate brand, and its founder Mukesh Bansal will occupy a seat on Flipkart's board, heading all fashion at the new entity. Flipkart will bring in its capabilities in customer service and technology. Both companies will also net customers that have shopped on both portals - about 80 per cent of the country's online shoppers have shopped on either Myntra or Flipkart. However, the companies will not integrate the back end. The two teams will also function separately. 3

4 Flipkart and Myntra are very different companies, so not merging all processes makes sense for now. However, it could lead to challenges later.flipkart is more of a multiple-category horizontal player, aggressive on growth and market share, with a strong focus on customer experience. Content has never been part of its core strategy. But for Myntra, focused as it is on fashion, the business model revolves around merging the customer experience of a fashion magazine with retail. The company has even roped in Bollywood celebrities such as Hrithik Roshan for its private brand, HRX. 4

5 However, achieving cost efficiency is not yet a concern for Flipkart. As Sachin Bansal puts it: "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." Financial details of the deal, including Myntra's valuation, were not disclosed by the two companies, but Mukesh Bansal said: "It is a fair valuation." 1.Acquisition targets include Sequoia Capital-backed Shopo.in, an online marketplace for Indian handicraft products, which was bought by online marketplace Snapdeal. The transaction was motivated by access to a network of sellers in a niche that would generate incremental value in terms of sales. 2.In another e-takeover, Flipkart acquired Letsbuy in order to deepen its catalogue of electronics products, while online babycare company Babyoye merged with competitor Hoopos in a demand acquisition play, as the companies targeted a similar customer base. Both were backed by Helion Venture Partners. CHALLENGES OF E-COMMERCE IN INDIA A.T. Kearney's 2012 E-Commerce Index examined the top 30 countries in the 2012 Global Retail Development Index (GRDI). India is not ranked. India, the world?s second most populous country at 1.2 billion, does not make the Top 30, because of low internet penetration (11 percent) and poor financial and logistical infrastructure compared to other countries. Some of the infrastructural barriers responsible for slow growth of e Commerce in India are as follows. Some of these even present new business opportunities. A. Payment Collection: When get paid by net banking one has to end up giving a significant share of revenue (4% or more) even with a business of thin margin. This effectively means parting away with almost half of profits. Fraudulent charges, charge backs etc. all become merchant's responsibility and hence to be accounted for in the business model. B. Logistic: You have to deliver the product, safe and secure, in the hands of the right guy in right time 5

6 frame. Regular post doesn't offer an acceptable service level; couriers have high charges and limited reach. Initially, you might have to take insurance for high value shipped articles increasing the cost. C. Vendor Management: However advanced system maybe, vendor will have to come down and deal in an inefficient system for inventory management. This will slow down drastically. Most of them won't carry any digital data for their products. No nice looking photographs, no digital data sheet, no mechanism to check for daily prices, availability to keep your site updated. D. Taxation: Octroi, entry tax, VAT and lots of state specific forms which accompany them. These can be confusing at times with lots of exceptions and special rules E. Limited Internet access among customers and SMEs. F. Poor telecom and infrastructure for reliable connectivity. G. Multiple gaps in the current legal and regulatory framework H. Multiple issues of trust and lack of payment gateways: privacy of personal and business data connected over the Internet not assured; security and confidentiality of data not in place. CURRENT STATUS OFE-COMMERCE SECTOR IN INDIA As already mentioned above, growth of e-commerce industry has been phenomenally high. However, its growth is dependent on a number of factors and most important of them is internet connectivity. As per Forrester McKinsey report of 2013, India has 137 million internet users with penetration of 11%. Total percentage of online buyers to internet users is 18%. Compared to India, China, Brazil, Sri Lanka and Pakistan have internet population of 538 (40%), 79 (40%), 3.2 (15%) and 29 (15%) millions respectively. Therefore, lower internet density continues to remain a challenge for e-commerce. According to Report of Digital Commerce, IAMAI-IMRB (2013), e-commerce is growing at the CAGR of 34% and is expected to touch US$ 13 billion by end of However, travel segment constitutes nearly 71% of the transactions of consumer e-commerce industry, meaning thereby that e-tailing has not taken of in India in any meaningful way. Share of e-tail has grown at the rate of 10% in 2011 to 16% in The figure, below, illustrates the growth in the market size since

7 E-COMMERCE MARKET SIZE FROM 2009 TO 2013 (Figures in Crores. Percentages indicate share of the overall market size) YEAR Dec 2009 Dec 2010 Dec2011 Dec2012 Dec2013 (estimated) Total market size 19,249 26,263 35,142 47,349 62,967 Online Industry Travel 14,953 (78%) 20,440 (78%) 2,6572 (76%) 34,544 (73%) 44,907 (71%) Online Industry Non-Travel 4,296 (22%) 5,823 (22%) 8,570 (24%) 12,805 (27%) 18,060 (29%)? E-Tailing? Financial Services? Classifieds? Other Online Services 1, ,872 6,454 10,004 1, ,255 2,886 3, ,682 2,354 3, ,110 1,388 Industry surveys suggest that e-commerce industry is expected to contribute around 4 percent to the GDP by In comparison, according to a NASSCOM report, by 2020, the IT-BPO industry is expected to account for 10% of India's GDP, while the share of telecommunication services in India's GDP is expected to increase to 15 percent by With enabling support,the e-commerce industry too can contribute much more to the GDP.. Major domestic e-commerce companies are Flipkart, Snapdeal, ebay, jabong, amazon, naaptol, Homeshop18 etc. As stated earlier, over 70% of all consumer e-commerce transactions in India are travel related, comprising mainly of online booking of airline tickets, railway tickets and hotel bookings. The biggest players in the travel category are Makemytrip.com, Yatra.com and the IRCTC website for railway bookings. Non-travel related online commerce comprises percent of the B2C e-commerce market. The unfettered growth 7

8 of online travel category has been possible because the regulatory and infrastructure issues do not impede its growth. Also, it does not face the infrastructure challenges since the goods need not be transferred physically.b2b and B2C Classifieds (jobs, matrimony, car, real estate etc.) contribute to 5%, whereas other online services such as online entertainment ticketing, online food delivery, buying discounts/deals/vouchers etc. form 2 % of the overall market. FUTURE OF E-COMMERCE IN INDIA It is found that countries making in the top list of the table of e-commerce have required technologies coupled with higher internet density, high class infrastructure and suitable regulatory framework. India needs to work on these areas to realize true potential of e-commerce business in the country Size of the total e-commerce market in India is estimated to expand at a CAGR of About 40.0 percent during to USD200.0 billion5. Likewise, India is expected to record the highest growth in the Asia Pacific region during The trend would shift with the online retail segment contributing equally to the total market size, considering it is expected to grow significantly in the coming years. The B2C segment would continue to lead the e-commerce market, thanks to the budding Indian Internet population, supporting demographics, ease of payment modes and customer-centric innovative policies. In the coming decade, we expect the sector to offer much more revolutionary practices such as Transacting with the help of Mobile money, and having access to virtual trial rooms. Continue shopping online as the sector is set to mature!! Today, we are talking about e-commerce progress level of India, the seventh-largest by geographical area, the second-most populous country, and the most populous democracy in the world. Indian e-commerce space percentage is getting higher as more and more online retailers enter the market. Although this level of entry in the e-commerce market is good from a long term perspective, the challenge is that most entrepreneurs don't have the resources or capital to wait for years before they can get profits. As foreign and domestic e-retail majors such as Amazon and Flipkart expand their businesses aggressively, hiring activities are expected to grow by over 30 per cent in the sector and may help create up to 50,000 jobs in the next 2-3 years. The e-commerce companies are also focusing on hiring lateral talent from top IT companies and niche retail focused firms for their technology functions while they hire from FMCG, consumer durables entities to fill in marketing and logistics positions. Besides, Growth industries inevitably attract youth and that significant part of the hiring in e-commerce is at entry or junior levels which accounts for a relatively younger profile of workforce. With global e-commerce giants entering India, demand for talent will increase along with compensation for top executives CONCLUSION Internet economy will then become more meaningful in India. With the rapid expansion of internet, e-commerce, is set to play a very important role in the 21stcentury, the new opportunities for M&A 8

9 that will be thrown open, will be accessible to both large corporations and small companies. The role of government is to provide a legal framework for E-Commerce so that while domestic and international trade are allowed to expand their horizons, basic rights such as privacy, intellectual property, prevention of fraud, consumer protection etc. are all taken care of e-commerce players need to make a quick turnaround and minimise fixed costs as much as possible.accordingly, different companies are resorting to different business models. Nevertheless, operating in a highly competitive environment with very low margins is not an easy job. Of the 193 e-commerce sites that were operational in India in October 2012, 89 have either shut down or merged with other retailers, essentially wilting under pressure from high operating costs. Although many factors support the growth of e-commerce in India, the fledgling industry is faced with significant hurdles with respect to infrastructure, governance and regulation. Low internet penetration of 11 percent impedes the growth of e-commerce by limiting the internet access to a broader segment of the population. Poor last mile connectivity due to missing links in supply chain infrastructure is limiting the access to far flung areas where a significant portion of the population resides. High dropout rates of percent on payment gateways, consumer trust deficit and slow adoption of online payments are compelling e-commerce companies to rely on costlier payment methods such as Cash on Delivery (COD) India needs to work on these areas to realize true potential of e-commerce business in the country REFERENCES 1.DIPP Discussion Paper on E-Commerce PANDEY I.M (2011), FINANCIAL MANAGEMENT Vikas publishing Housing P. Ltd. New Delhi, PP Eugene F. Brigham, Joel F. Houston, 12th edition, Fundamentals of Financial 4.Management South-Western, a part of Cengagel earning, USA, PP WEBSITES on-amazon-local-players-push/article ece / html 10. Priyanka Assistant Professor, Ramjas College, Universtiy Of Delhi. Khushboo Sagar Assistant Professor, Shri Ram College Of Commerce, Universtiy Of Delhi. Richa Verma Assistant Professor, Ramjas College, Universtiy Of Delhi. 9