There's no deal; Snapdeal, Flipkart call off merger talks

Softbank would in all probability invest in Flipkart and not continue its association with Snapdeal

After a long-drawn David versus Goliath style contest to retain control over one of the oldest e-commerce companies in the country, Snapdeal co-founders Kunal Bahl and Rohit Bansal have prevailed over their biggest investor Japanese telecom giant SoftBank Group. Bahl and Bansal hold just about 6.5 per cent in Snapdeal, while SoftBank, with an investment of over $900 million, has around 33 per cent in it. 

In a short statement, Snapdeal said on Monday morning that the company was terminating all strategic discussions and would now pursue an independent path. It stayed silent on the job cuts that might follow, with estimates putting the layoffs at around 80 per cent. Also, fresh talks for possible investment deals may have already begun with names such as Tokyo-based Rakuten doing the rounds, some suggested. Sources said Rakuten may pick up some stake from SoftBank. There was no confirmation on the same.

SoftBank has been at the forefront past five months trying to sell Snapdeal to Bengaluru-based Flipkart, as the Japanese conglomerate saw little value in staying invested in a company that was once its most prized Indian asset. 

“Snapdeal has been exploring strategic options over the last 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,” a Snapdeal spokesperson said. Flipkart did not respond to queries from Business Standard. SoftBank was quick to react. “Supporting entrepreneurs and their vision and aspirations is at the heart of Masayoshi Son’s and SoftBank’s investment philosophy,” the Japanese investor said. While stating that it respects the decision (of Snapdeal) to pursue an independent strategy, SoftBank added, “We look forward to the results of the Snapdeal 2.0 strategy, and to remaining invested in the vibrant Indian e-commerce space.” For now, SoftBank would retain its two seats in the Snapdeal board, it is learnt.

Among other investors, Vani Kola, managing director of Kalaari Capital, said in a media interview, “I am extremely disappointed and shocked.” According to Kola, the founders had not kept in mind interests of investors and employees. She said she didn’t have prior information of the deal being called off. 

The founders, however, didn’t keep people guessing on what Snapdeal 2.0 would look like. In a mail to the employees soon after announcing that the deal talks were over, Bahl and Bansal chalked out a road map to profitability in the next 12 months. In fact, Bahl has started running his fourth pivot of the online marketplace, calling it Snapdeal 2.0. 

“We have made tremendous progress towards this new path over the last few months and are already profitable at a gross profit level, with clear visibility to making upwards of Rs 150 crore in gross profit in the next 12 months. There is zero ambiguity. We will be running the company as we have been and rapidly moving ahead with our mission,” he said in the mail.

Snapdeal wants to model itself on Taobao, Alibaba’s B2C and C2C unit. The company just closed a $60 million deal by selling its online wallet FreeCharge to Axis Bank. With this money as well as the cash in bank, the company hopes to have a running time of around four years.

SoftBank, while orchestrating the merger with Flipkart, worked on convincing Snapdeal board members including the founders, early stage investors Nexus Venture Partners (NVP) and Kalaari Capital to get on board with the deal. But it was never able to get the vote of all the board members with founders vetoing against the merger every time it was tabled. According to sources, NVP also supported the founders since the beginning.  However, finally agreeing with the Snapdeal board, SoftBank agreed to let Bahl go ahead with his plan.  

Why was the deal called off?

Sources said that the Snapdeal board thought that there were ‘too many contradictions’ in the deal including the indemnity clause which Flipkart wanted the board to sign. The valuation was always a sticky issue as the founders, early stage investors and smaller shareholders found the markdown of Snapdeal from $6.5 billion to a billion dollars was unacceptable. 

Road ahead

It is going to be tough ride for Bahl from here as it would involve running a tight ship and laying off several hundreds. While some industry experts fear almost an 80 per cent cut-down in the workforce, company insiders said that the total head count could be brought down from 1,200 to 700. 

“With the ongoing streamlining of costs and sale of some of our assets, such as FreeCharge, we are financially self-sufficient as a company and don’t need to raise additional capital to reach profitability,” Bahl said.  He added, “Needless to say, we will need to keep a tight control on our costs and work towards becoming a hyper-efficient culture, delivering profitable growth month-on-month,” Bahl said in his mail.

Likely shareholder unrest

Rumblings over Snapdeal’s decision to walk away from the deal have started, said sources. A number of minority shareholders have written emails to the Snapdeal board, citing disappointment with the deal not going through. If there is enough momentum among shareholders, there might be a way out to revisit the deal and iron out possible kinks, added sources. Kunal Bahl is also reportedly in touch with his legal team.