Step by Step Guide to Mergers and Acquisition in E-commerce
Savvy Midha | Updated: Oct 10, 2019 | Category: E-commerce, SEBI Advisory
ECommerce is a platform for doing business with reasonable regulations and several potential avenues. It provides an opportunity for generating a profit and finding a niche market. E-Commerce has given companies an extra room for experimenting, diversification, and growth.
With globalization and cut-throat competition, the market conditions for the survival of businesses are hard. One of the strategies to beat the competition that prevails in equal footing is to buy and acquire your competitor or to pool the resources and funds of each other through merger and deciding mutually about the ownership.
Merger and Acquisition in E-Commerce provide the owners with an alternative option to expand and enhance their scales of operations. These have been discussed in detail henceforth.
E-Commerce: An Overview
E-Commerce allows businesses to expand via the internet. E-Commerce refers to where commercial transactions take place online. Rapid Growth of E-Commerce leads to speedy services to consumers online with the development of well-designed and user-friendly online trading platforms with online payment and efficient delivery systems. The top examples of E-Commerce are Amazon.in, Flipkart, Myntra, Warby Parker, etc.
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E-Commerce has the following 4 categories:
- Business to Business (B2B): Trading of goods and services between two businesses. Mostly manufacturer and wholesaler follow this model.
- Business to Consumer (B2C): Selling of goods and services by the business directly to Individual consumer
- Consumer to Consumer (C2C): It allows one customer to sell directly to another customer. For example, OLX.
- Consumer to Business (C2B): In this, the customers make trade alliances with For example, Trivago, where customers quote their prices which are quoted on the website.
Merger & Acquisition – Quick Overview
In the case of mergers, two businesses come together to form a single organization. Entire resources, assets, liabilities, shareholders, and employees are combined with working together with synergies and gaining a competitive advantage over similar businesses operating in the market.
The companies can enter into a horizontal or vertical merger depending upon their requirements. The purchase of 20th Century Fox by Disney is an example of a major horizontal merger.
The acquisition involves purchasing another company. In this case, the Acquirer Company decides the Target Company (for buying), sets the bid or purchase offer, complete the formalities, and eventually buys it.
Whether it is a merger or acquisition, shareholder’s approval is required in both cases to get the majority approval for selling the company.
Types of Merger
Following are the different type of mergers:
- Horizontal merger: The merger between two businesses operating in the same field.
- Vertical merger: The merger between two businesses in the same supply chain.
- Conglomerate merger: A combination of two entirely different firms.
- Concentric merger: It is a merger between two companies that share a common consumer base, manufacturing unit, etc.
- Forward merger: In this, the target Company merges into the Acquiring Company.
- Reverse merger: It is the opposite of forward merger in which the buyer get merged into the target by allowing the shareholders of Buyer Company to hold the shareholding in Target Company.
Types of Takeover
Four types of takeover or acquisition are:
- Reverse Takeover: For instance, a private company takeovers a public company.
- Bailout Takeover: Sick Company is taken over by a profit-earning company to bail out the sick company from the lengthy procedure of liquidation.
- Friendly Takeover: Takeover is made with the consent and negotiation between the Target Company and Acquirer Company by signing an agreement between both the managements. The bid is made with the consent of the majority shareholders.
- Hostile Takeover: Under this, there is no proposal made or any negotiation done with the target company. Rather an acquirer against the wish of the Target Company silently pursues an effort to gain control over the company.
Also, Read: Mergers and Acquisitions in Financial Institutions.
Strategic Reason behind E-Commerce combinations
Merger and acquisition are carried on for the following strategic reason other than the motive driven by the need to cut the cost:
- Positioning: Companies position themselves to take advantage of emerging trends in the marketplace. Companies look for opportunities that can be exploited after the combination of two companies.
- Gap-Filling: One company has a certain weakness, which can be the strength of another company. Differences in gaps can be filled by combining the two companies for the long-term survival of both the business.
- Bargain Purchase: Acquiring is cheaper and easier than Investment. For example, A company manufacturing car can buy a company manufacturing tires rather than investing in building its manufacturing unit of tires.
- Diversification: Combinations help in achieving long-term growth and profitability, but it is not a possibility in every case. For instance, managing a steel company is entirely different from the management of Software Company. Therefore companies after thorough research and analysis shall wisely choose the target business.
- Boost up the performances: With the help of merger and acquisition, the company with consistently poor performance can boost its profitability and performance through the competitive advantages of another company.
Recent merger and acquisition amongst E-Commerce
Flipkart & Myntra
The merger between two popular E-Commerce websites was in discussion for a long time. According to sources, the long-awaited Indian E-Commerce wedding is almost done now. The deal between the two has been completed and is soon being followed by the integration process.
Flipkart has been dealing in electronics, apparel and other categories tried to catch up on the Myntra which is the market leader in apparel.
The joining of the two companies will create synergies in three forms:
- Revenues: Revenue and income will be generated at a higher percentage compared to the one incurred when two operated separately.
- Expenses: Expenses will be disbursed and distributed between the two leading companies, thereby creating more places for profits.
- Cost of Capital: There will be an overall lower cost of capital.
Alibaba & Net Ease
It is one of the rare combinations of two of China’s largest internet giants. Alibaba Group Holding Limited acquired the Net Ease Inc, an e-commerce platform that provides music streaming services in a deal worth $2 Billion. Net Ease remains in control of the share of its music apps. The agreement has created a dominant market for the customers seeking for foreign labels and goods.
E-commerce has taken the business world by storm since it has given corporations a huge avenue for market generation and widening customer base. The platform of e-commerce has become so popular that ventures are now experimenting on the approaches via which they can enhance their profitability and credibility on e-commerce platforms. Via e-commerce, several businesses operating in different corners of the world can come together, take advantage of each other’s strengths, and considerably reduce the effects of their weaknesses.
Read, Also: Due Diligence Process for Merger and Acquisition.
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