Flipkart's decision to acquire the country's largest online fashion retailer Myntra has stoked talks of consolidation in India's nascent e-commerce industry. It has been seen by many as a significant milestone in the evolution of our e-tailing landscape and a fitting response by a home-grown brand to Amazon's rapid expansion bid in the country. Experts have hailed the deal also for its potential to help Flipkart improve margins and chart the road to profitability quicker than the two companies would have been able to do as separate entities. This in turn will also mean a faster exit for investors via an IPO, deal watchers have been quoted as saying.
The presence of two common funds - Tiger Global Management and Accel Partners is also expected to lead efficiencies in a myriad ways while synergies particularly in apparel where Flipkart was a late entrant while Myntra is a leading player will immediately catapult the combined entity to market leadership position, analysts have proclaimed. Analysts also insist that synergies are expected to be derived out of each other's technology and delivery platforms as well.
The purported Rs 1,800 crore ($300-million) stock-and-cash deal has evidently got the market excited. In the midst of such sanguine annotations though, Mahesh Murthy, veteran venture capitalist, marketer and co-founder of Seedfund has sounded off a note of caution about the merger.
Writing on Quartz, Murthy says he spots a worrying pattern where post its acquisition of companies (such as Chakpak - the music content assets of which Flipkart bought, while the rest was acquired by Trivone and LetsBuy), Flipkart has tended to shut them down despite earlier assurances that it wouldn't. Flipkart doesn't intend to shutter Myntra either it has confirmed.
Also each of the firms in question - Chakpak, Trivone, LetsBuy, Flipkart, Myntra and Sher Singh (which Myntra acquired) - Murthy notes, are funded and majority owned by the same sets of investors - Accel Partners and Tiger Global (which was invested in the biggest three - LetsBuy, Myntra and Flipkart) and so the culmination of the big Myntra-Flipkart deal he concludes is "perhaps less about finding a great acquisition opportunity and more about the funds who own these firms taking five eggs from five wobbly baskets, putting them all into one larger basket and hoping it wouldn't wobble so much".
Murthy in the same piece also comes down heavily on the disclosure by Flipkart founders about their nearly $2 million salaries and says all these things put together make him believe this deal is "less about entrepreneurial passion to hack it and more about trying really hard to make The Great Indian Roll-up work for its investors."
He doesn't give Flipkart much of a chance for redemption in the future either. Technically it cannot list in India as it is still losing cash after raising almost $600 mn, Murthy says, and the US markets may not be supportive either for a listing given that mightier Amazon's presence will be lingering in the shadows.
What next then for the country's poster boy of e-commerce?
"Flipkart is on a timeline—it will likely run out of cash in a couple of years. A public listing is one option. And there’s a bunch of folks the company can flip it to: Amazon is a potential buyer, if they choose to bite on a large asking price. Or if the Chinese or Russian giants, or Japan’s Rakuten choose to do so. Or something else will be cooked up among the guys who ponied up that $600 million chunk of change," Murthy reckons.
This is not the first time the Seedfund founder has lashed out against Flipkart or its investors. He has been a fierce critic of its business model, even warned of bubble like valuations and has in the past replied to a Quora question "Why does Mahesh Murthy hate Flipkart?" with a scathing reply where he said Flipkart may not ever be a 'real business'.
"Flipkart, I believe comes a little more from the iBanker/topi school of “let’s do spreadsheets on India vs China vs US, figure out some potential future imaginary valuation, do some funny accounting to seemingly minimize losses, throw loads of money (over Rs 3,000 Cr raised at last count) at a problem, continue to lose money forever, and hope like hell someone buys it someday, because it may never actually be a real business but who gives a damn about that anyway as long as all of us get big fat Rs 10 Cr salaries in the meanwhile,” Murthy was quoted as saying on the VCCircle website in October 2013.
Over to Flipkart now.
