This article is written by Eshvar Girish, pursuing Diploma in M&A, Institutional Finance and Investment Laws (including PE and VC transactions) from Lawsikho.com.
Table of Contents
Introduction
Mergers and acquisitions in India are primarily governed under Companies Act, 2013 and Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 respectively. Acquiring companies that operate in the same sector can sometimes be dicey as it essentially amounts to placing all the eggs in the same basket, i.e., investing all the funds into the same sector. However, such an acquisition can be strategic in nature if the target company is a market leader for a specific type of product since the acquisition of an entity in the same market will increase its market share substantially. This is why Flipkart acquired Myntra and is currently one of the biggest online fashion companies in India. However, it is pertinent to note that after the acquisition of Myntra by Flipkart neither of the party’s existence was affected as they continued to operate separately and independently.
What was the reason behind such an acquisition?
The reasons why Flipkart acquired Myntra are stated below.
- The acquisition of Myntra by Flipkart allowed Flipkart to venture into the fashion space which was an untapped market by Flipkart before the entities could merge. Thus, this helped Flipkart to exploit a market which was unavailable to it earlier.
- As Flipkart had plans to make its foray into the fashion industry, it was a cost-efficient ploy to acquire Myntra, rather than building its own fashion business from the scratch. It is always cheaper for the acquirer to acquire another company instead of building a similar company on its own.
- Flipkart had the plans to diversify its business into the fashion industry since diversification is key in achieving consistent long term growth and profitability. Diversification is crucial for companies who have their presence in mature industries where future growth is possible.
- Since Myntra was very successful in the fashion industry and due to its competitive edge over Amazon and Snapdeal, it was an attractive buy for Flipkart. The acquisition of Myntra made Flipkart a leader in the fashion industry.
It is important to realize that Myntra was not for sale at the time when Flipkart approached it but it was persistent on acquiring only Myntra even though Jabong was for sale at that time. Flipkart’s persistence can be attributed to the fact that Myntra was ranked number 1 in the fashion industry in terms of sales while Jabong ranked number 2.
Why did Myntra agree to be acquired by Flipkart?
Before the acquisition took place, Myntra’s market share was only 30 percent of the online fashion sales, but after being acquired by Flipkart, its market share jumped to 50 percent in a market that was clocking around 100 percent annualized growth. Both the entities benefitted from the acquisition as Flipkart acquired a market leader in the online fashion space while Myntra’s sales were bolstered by the capital infused into it by Flipkart. Flipkart took advantage of the fact that Myntra was undervalued and cash strapped thereby acquiring it at a competitive price. The infusion of capital by Flipkart was essential for Myntra since it was going through a cash burn phase and needed additional funds to survive. Myntra’s other alternatives like going public did not materialize as it realized that being acquired was a more feasible option.
What was the strategy behind such an acquisition?
The transaction between Flipkart and Myntra was smooth because there was absolutely no resistance or hostility portrayed by either of the parties. This implies that the transaction was beneficial to the managements as well as the investors of both the companies. The other reasons why this deal was beneficial to both the parties are stated below:
Mutual benefit for both the parties
Flipkart saw the potential in entering into the online fashion industry while Myntra saw the possible benefits which could be gained through the access to Flipkart’s logistic network. The transaction was a win-win situation for both the parties as it benefitted both the companies equally.
Common Investors
It is pertinent to note that Flipkart and Myntra had some common investors, i.e. Accel Partners and Tiger Global. The deal witnessed support from both the investors as they saw potential for huge gains by investing a smaller amount. Flipkart acquired 100 percent stake in Myntra for an estimated amount of Rs.2000 crores through a cash and stock deal. Accel Partners and Tiger Global played a significant role in the completion of the said transaction. The acquisition of Myntra was conducted through a share swap between the shareholders of Myntra and Flipkart which made the initial shareholders of Myntra substantially richer after the deal was completed.
Warm welcome to the target company
The management of Flipkart considered Mukesh Bansal, the founder of Myntra as a much needed asset and a mentor for the growth of Flipkart in the online fashion industry. Post the acquisition process, Mukesh Bansal also joined Flipkart’s board in order to partake in Flipkart’s fashion business. The deal was structured in such a way that Flipkart and Myntra were to remain as separate entities but people who held a stake in Myntra would become the shareholders of Flipkart. It was also agreed that the Myntra’s management would be retained without any changes. Further, a consensus was entered into that neither Myntra’s road map or the designation of its employees would be altered. Such a setup would enable both the companies to function without any hindrance from each other and preserve a unique culture.
Beneficial for the employees of the target company
The acquisition process is always a lot easier if the employees of the target company favor such an acquisition. Therefore, in the current case, Myntra’s employees who held stock options supported the acquisition by Flipkart since they were provided with stock options in Flipkart. This was clearly beneficial to them and they had no reason to reject the acquisition offer of Flipkart.
No regulatory hurdles
There were no regulatory hurdles faced by Flipkart while acquiring Myntra and it was a hassle-free transaction for both the parties as all the authorities approved the acquisition without any objections.
Similar Cases
A similar case can be observed in the acquisition of TaxiForSure (TFS) by Ola. Ola decided to acquire a 100 percent stake in TaxiForSure for $200 million in a cash and stock deal. It was one of the biggest ever acquisitions in the world of start-ups. This acquisition was essential to tackle the competition faced from its competitors, i.e. Uber and Meru cabs.
Ola always had the plan to poach the drivers of TFS by promising them more business and higher incentives. However, TFS, due to its ample financial resources spent heavily on discounts and slashed the fares of their cabs in order to give more incentives to their cab drivers. This lead to the exhaustion of all its funds that were raised earlier leading to a cash burnout. Moreover, due to the drying up of the funds, TFS had to urgently raise its next round of funds. Although, the fund-raising talks had started with possible investors, the unprecedented ban on cab services such as Uber, Ola and TFS brough its funding plans to a grinding halt. The said ban was imposed by the Delhi’s transport regulator after a female passenger alleged that she was raped by an Uber driver. As soon as the ban was imposed, the investors who were interested in TFS backed out as they were sceptical about the next actions of the regulatory authorities with respect to the ban. Although, the cab services were restored later, Ola’s massive financial resources and the ban in Delhi triggered the acquisition of TFS by Ola.
Similarly, Lenovo acquired Motorola for strategic reasons. Firstly, it would help Motorola to increase its market share in the United States since Motorola had a history of 85 years in the United States. Although Lenovo was one of the leading PC manufacturers, it was beneficial for it to acquire Motorola since Motorola was known for its smartphones. Lenovo wanted to make its foray into the smartphone business as its PC business growth had declined. It was not only about capturing the US market, as Lenovo could also offer full technology packages to its US business clients as it had a good link with its ThinkPad and ThinkCentre products.
Closing Remarks
Myntra started off with the personalization of merchandise and then moved to the fashion industry. It was known for providing the best value proposition to customers in the fashion industry. Its primary aim was to take its platform to a different level by being acquired by Flipkart. Further, this deal enabled both the companies to exploit their mutual synergies, i.e. advanced technology of Flipkart and market leadership of Myntra to facilitate each other’s growth. Therefore, this deal provided an opportunity for fashion and technology to work together and contribute to each other’s growth thereby making it a win-win situation for both the parties.
References
- https://yourstory.com/2016/07/flipkart-myntra-jabong-acquisition/
- https://www.livemint.com/Companies/p5nkYHmjFR5jNqn1Q9ZZLO/How-Flipkart-sealed-the-deal-with-Myntra.html
- https://www.livemint.com/Companies/3ttBCzdlVcJ9SzNHCh5oqM/Success-Myntra-How-Flipkart-turned-fashionable.html
- https://www.lexology.com/library/detail.aspx?g=76b44435-1c48-44cc-bd1a-940b5de48d37
- https://www.livemint.com/Companies/uw4NnmLZdDcS3bwlEDay0M/Ola-Cabs-buys-rival-TaxiForSure-for-200-million.html
- https://in.pcmag.com/smartphones/66822/5-reasons-why-google-sold-motorola-and-5-reasons-why-lenovo-bought-it
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