Should Amazon Buy Flipkart, Now

Speculation is rife that Amazon was contemplating to buyout Flipkart, India's largest E-Commerce player, in terms of Market share, at whopping price of $8 billion. Even though the founder of Flipkart has denied any such talk and attributed to mere rumours, but if the Industry buzz and grapevine is to be believed, it seems the preliminary talk did happen. Now this piece neither confirms the potential deal nor the value talked about but will try to ascertain if it makes business sense for Amazon to buy flipkart in current circumstances.

Valuation correction:

Just two months back, Morgan Stanley booked a cut in the value of its stake in the flipkart by 27%, there by implying the value of Flipkart to be $11 billion, this was followed by consecutive markdowns by several of the investors, basis which latest valuation is close to around $9.5 billion. Last round of funding had valued Flipkart around $15 billion. Several reasons are being attributed to the past high valuations namely mismatch between supply and demand of funds, investors bet on early movers, industry dynamics , alibaba.com's blockbuster listing , India Story, et al . Much of the sanity has been restored and course correction will continue as investment spree, trying to hit the jackpot in blind alleyway with unclear view, will abate. Market, its potential players, coordinates, growth trajectory is almost clear now, thus expecting any unrealistic high valuation is thing of past. There is not even a single visible factor, which potentially can revert its valuation to the good olden days. Beside that Overall business scenario and macro economic reasons tend to suggest that economic performance of Industries will remain subdued. Thus, sliding valuation should be of paramount importance while Amazon evaluates, if it makes ‘strategic sense' to buy them out.

Strategic Sense:

Elaborating on this 'Strategic Sense' as mentioned Supra, India is one of the last big E commerce markets left and Amazon doesn't want it to go China way, where it lost to alibaba.com. With alibaba.com coming directly and having already investment in India's two large large E Commerce players - Snap deal and paytm- apparent enough Amazon would like to consolidate its position pre-emptively. Buying out the market leader, no doubt, send right signals and will help Amazon in thwarting potential threat from alibaba.com but that should not be the sole criteria for evaluating the opportunity.

Derived Synergies:

Amazon has been in operation in India for a while, pumped in close to $7billion more than the announced amount of $2 billion. Its brick and mortar logistics, backbone of any E- Commerce player is in place, rather one can safely say it is Robust. Customer loyalty towards particulars one E- Commerce player is fragile; price point/Discount has been the main sticking point for them. Thus, from operations or customer acquisition point of view, there is hardly any derived synergy. Another criteria could have been category advantage of Flipkart, but looking closely, there is hardly any gap. Flipkart is category leader in selling smart phones, where margins are strained and Amazon has been catching up in this category at pretty decent speed. Off the cuff calculations suggest, Cost saving due to employees and technology rationalization, will be a long haul exercise.

Managing Regulatory uncertainties:

India's FDI norms does not allow foreign direct investment in on-line retail companies that own inventory and sell directly to consumers, they can operate as Marketplace. To circumvent this legal hurdle, both Flipkart and Amazon have created entities WS retail and Cloudtail( It's in JV with Narayan Murthy's owned entity called Catarman), who act as a seller on their platform. Recent notifications of Government has mandated E commerce player that no single seller on its platform should contribute to more than 25% of its Sales. Even though, exact figures are not available but it is believed that more than 40% of the sale comes from these two entities on their respective platforms. Thus Potential acquisition has to evaluate the consequences of this legal requirement on combined entity. Per se, the policy on FDI in E- Commerce has been in flux and will take time to stabilize, just two backs traders community, having considerable sway, has issued strong threats against liberalization in on-line retail. Thus provoking a larger question, does it merit to take such a bold bit in this atmosphere of Uncertainties or wait a bit and see the which way the wind blows.