Why any merger between Amazon and Flipkart is unlikely

Why any merger between Amazon and Flipkart is unlikely
Photo Credit: Reuters
4 Apr, 2018

US-based online retailer Amazon.com Inc.’s is reported to have held initial talks to acquire homegrown e-commerce major Flipkart Ltd, but a transaction is highly unlikely considering the business, regulatory and valuation challenges.

The Mint newspaper on Wednesday reported, citing two people it didn’t name, that Amazon may try to counter US-based Walmart Stores Inc., which is said to have engaged in talks to buy a 55% stake in Flipkart from investors including US-based Tiger Global and Japan’s SoftBank Group Corp.

This is not the first time a media publication has reported about a potential merger between the two largest e-commerce companies in India. And while the idea to create a strong e-commerce company by merging two e-tailers that don’t undercut each other might sound interesting, it’s not very probable, say industry executives.

Email queries to Flipkart and Amazon for comments did not elicit a response till the filing of this article. However, three industry executives TechCircle spoke with said they did not see any synergy between the two companies, apart from reducing discounts, and that any potential deal could face a high level of scrutiny from the Competition Commission of India.

“These are strange times. (Amazon founder) Jeff Bezos is the richest man today and there is too much money floating around,” a venture capital investor told TechCircle, asking not to be named. He added that the deal is unlikely to happen as some of Flipkart's investors are unlikely to be interested in selling off.

High price

Another investor said the reported price is too steep to make sense. “Why would Amazon spend $15-20 billion to buy Flipkart when it is doing as good as its rival, if not better? It can spend as much on Amazon India and has a better chance at being the dominant player,” he said.

According to data platform Paper.vc, Flipkart’s valuation has significantly increased from around $13 billion to $17-19 billion following the move to buy back stock options from over 3,000 current and former employees of the company and its subsidiaries Myntra, Jabong and PhonePe. However, VCCircle could not independently verify the claims.

The Mint report said Amazon’s offer could involve buying fresh shares of Flipkart at a valuation of as much as $21 billion.

The investor cited above also said that India’s e-commerce sector doesn’t need any consolidation at the top when the market is large enough to accommodate two players in the long term. “Both these players are well funded to run for years. A buyout will not be beneficial for both in the short term and too complicated to work with Flipkart's investors,” he said.

Regulatory challenges

The biggest challenge to the deal could come from the CCI. “This is detrimental to consumer interest and competition. While there might be other e-commerce players in the market, all indications show that Flipkart and Amazon together could be monopolistic,” said the first investor cited above.

Roma Priya, founder at Burgeon Bizsupport LLP, a legal firm that works with startups, said that a likely consolidation of the two biggest players in the India e-commerce sector will impact the online retail market.

“The CCI's primary function is to ensure freedom of trade carried on by other participants in the market. So, there could be a possible chance of the CCI initiating an inquiry if Amazon offers to buy Flipkart,” she said.