Consolidation gains momentum in e-commerce
The news of Zovi.com acquiring Inkfruit.com has again spurred consolidation in the e-commerce space in India, with experts saying the trend of consolidation, which started last year, is only set to gain momentum in 2013.
“Consolidation in the e-commerce space is definitely on the cards. And if both the firms have the same investor, the process becomes smoother,” says Manmohan Agarwal, CEO at e-tailer firm Yebhi.com. PE firm SAIF Partners was the common investor for both Zovi and Inkfruit.
There were at least 15 merger and acquisition (M&A) deals in 2012 in the e-commerce space — much higher than 2011 as per M&A deal tracking firm Venture Intelligence.
Online retailer Flipkart acquired electronics retail firm Letsbuy.com for $25 million last year. PE firms Tiger Global and Accel Partners are investors in both the firms. Also, lifestyle retailer Fashionandyou.com acquired cosmetics retailer Urban Touch. E-commerce portal Yebhi.com bought Gurgaon-based lifestyle and fashion retailer Stylishyou.in, and Myntra acquired online fashion brand SherSingh.
“Normally e-commerce consolidation deals are PE-facilitated because investors are common and help make a connection. Many e-commerce firms opt for consolidation because even though there is value in the company, it lacks the strength and drive to raise capital. I see many more firms opting for consolidation this year. A few that are able to raise funds will get past and the rest will look at mergers,” says Alok Mittal, managing director at Canaan Partners. The firm has invested in e-commerce companies like Naaptol.
“Consolidation is a very subtle way of talking about M&As. It is beneficial for the investors because when one of their collapsed investee firms merges with the other investment, they will not be forced to write it down to zero,” says Mahesh Murthy, co-founder at early-stage venture firm Seedfund. “If the VC or PE investor is able to sell his loss-making investment to another company, he can put off showing the loss and hope for a reduction in the loss in future,” he adds.
Last year, the e-commerce sector witnessed 31 PE and VC deals with an investment of $298 million.
But the way to such mergers and acquisitions is not smooth. “The rationale of such consolidation is a hard one, because operations are not easy to combine. You have to see the brand that your acquiring,” says Mittal. “There are numerous integration issues when M&As happen, as the e-commerce space is new in India,” adds Agarwal of Yebhi.com. But he does not see any benefit for existing investors in mergers. “Unless e-commerce firms are generating cash and have seen a break-even, there is no benefit in terms of exits for the PE firms,” he says.
A few experts feel many target firms were not bought willingly by the acquirer. “Many acquisitions have been made at gunpoint by investors,” alleges Murthy of Seedfund, saying the result is a lack of complete integration. “When Flipkart.com acquired Letsbuy.com, the former had promised no job cuts, but ultimately the latter was wiped out,” he argues.
“We see consolidation when you have got series A and B funding and post that VCs no longer see value in the scale-up. They have a particular time frame to operate in because it is not a lifelong investment and showing returns to their investors becomes crucial,” says Peyush Bansal, founder of online optical store Lenskart.com. “The investor is left with very few options to exit, like IPOs or merging the firm with another or bringing in a third investor who is willing to buyout his stake,” says Bansal. Automobile website Carwale.com was acquired by multimedia firm Axel Springer AG and India Today Group from VC firms Sierra Ventures and Seedfund.
“Other reasons for M&As are that the offer by the new investor or firm is too good or the company is not doing well and couldn’t find more investors, so it gets bought out. Many times their (investee firms) individual existence wasn’t doing any justice to the stakeholder,” says Bansal of Lenskart.com.
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