Snapdeal may Fire More Em­ploy­ees

Snapdeal-Flip­kart deal talks ter­mi­nated; SoftBank may have to re­draw con­tours of pro­posed in­vest­ment in Flip­kart

The Economic Times - - Front Page - Our Bu­reaus 33% STAKE,

New Delhi | Bengaluru: Jasper In­fotech has ter­mi­nated ne­go­ti­a­tions for the pro­posed sale of its trou­bled on­line mar­ket­place Snapdeal to mar­ket leader Flip­kart on Mon­day, end­ing nearly seven months of tu­mul­tuous dis­cus­sions ini­ti­ated by its largest in­vestor SoftBank.

Snapdeal said that it will pur­sue an “in­de­pen­dent path”, while the Ja­panese in­ter­net and tele­com con­glom­er­ate said in a state­ment that “we re­spect the de­ci­sion”, bring­ing the cur­tains down on a pro­tracted saga that was once ex­pected to re­sult in the largest buy­out in In­dia’s high-pro­file startup sec­tor.

The col­lapse of the talks be­tween Flip­kart and Snapdeal was first re­ported by ET in its July 31 edi­tion.

The Tokyo-head­quar­tered in­vestor, which re­cently raised the largest pool of pri­vate cap­i­tal ever as­sem­bled for its $100-bil­lion Vi­sion Fund, is now ex­pected to go back to

AND MAY NOW IN­VEST IN FLIP­KART IN­DE­PEN­DENTLY

the draw­ing board to work out the pos­si­ble modal­i­ties of its pro­posed in­vest­ment in Flip­kart, and will hope to in­vest at the same val­u­a­tion — $11.6 bil­lion — that the Ben­galu­rubased on­line re­tailer snagged from Ten­cent and Mi­crosoft ear­lier in April.

“I be­lieved that this (the merger with Flip­kart) was the right thing to has lashed out at the founders, say­ing de­ci­sion “dis­re­gards” in­ter­est of ma­jor­ity of share­hold­ers and em­ploy­ees

do. But once the com­pany and the founders have de­cided on a dif­fer­ent path, we will sup­port them. My job, as a board mem­ber, was to present them with op­tions, and we pro­vided them with a cou­ple of dif­fer­ent and vi­able op­tions,” said Kabir Misra, manag­ing di­rec­tor, SoftBank Group In­ter­na­tional, and its rep­re­sen­ta­tive on the Gurgaon-based on­line mar­ket­place’s board.

The frac­tious and of­ten bit­ter board­room bat­tle — which ended with co­founders Ku­nal Bahl and Ro­hit Bansal with­hold­ing their as­sent to the re­vised bid from In­dia’s largest on­line re­tailer — looks set to come out in the open.

One of the com­pany’s early in­vestors Kalaari Cap­i­tal vented its ire against the move, stat­ing that the de­ci­sion by Snapdeal’s founders “has not re­ceived our sup­port”.

Mean­while Snapdeal is pre­par­ing to lay off large num­bers of its work­force ahead of don­ning a fresh avatar, said three peo­ple who spoke to ET on the con­di­tion of anonymity.

An­nounc­ing their de­ci­sion to forge a new path for the com­pany, which they termed as Snapdeal 2.0, Bahl and Bansal in a let­ter to em­ploy­ees on Mon­day wrote “we have made tremen­dous progress to­wards this new path over the last few months and are al­ready prof­itable at gross profit (a.k.a. net mar­gin) level, with clear vis­i­bil­ity to mak­ing up­wards of Rs150 crore in gross profit in the next 12 months”. Snapdeal did not re­ply to ET’s queries on the plan to lay off em­ploy­ees.

SET­BACK FOR SOFTBANK

The fail­ure to close the pro­posed buy­out marks a set­back for the world’s largest tech­nol­ogy in­vestor, which had aimed to con­sol­i­date its hold­ings in In­dia with the sale of Snapdeal to Flip­kart, and sep­a­rately the pur­chase of pay­ment arm FreeCharge by an­other port­fo­lio com­pany Paytm. Both deals have now fallen through. Last week one of In­dia’s largest pri­vate lenders Axis Bank bought FreeCharge for about Rs 385 crore.

The all-stock buy­out of Snapdeal by Flip­kart was also meant to re­sult in an in­vest­ment of $1.5-2 bil­lion in the Bengaluru-based com­pany by SoftBank. This in­fu­sion was ear­marked for ac­qui­si­tion of shares held by Flip­kart’s largest in­vestor Tiger Global Man­age­ment, ac­cord­ing to peo­ple di­rectly aware of the ne­go­ti­a­tions.

How­ever, the con­tours of the Ja­panese con­glom­er­ate’s in­vest­ment in Flip­kart may have to be re­drawn, given the col­lapse of the ac­qui­si­tion of Snapdeal.

IN­VESTORS UN­HAPPY

Vani Kola, MD at Kalaari Cap­i­tal and one of the ear­li­est ven­ture cap­i­tal­ists to back Snapdeal, lashed out at the de­ci­sion of the founders to call off the deal, ar­gu­ing that it was not in the in­ter­est of all share­hold­ers. Her firm owns an 8% stake in the Gurgaon-based com­pany and along with an­other early in­vestor Nexus Ven­ture was due to re­ceive spe­cial pay­outs as part of the sale process.

“I was ex­tremely dis­ap­pointed in the founders and their dis­re­gard

for in­vestors and em­ploy­ees in­ter­est. I had no prior in­for­ma­tion of this ac­tion, this was not dis­cussed with us and has not re­ceived our sup­port,” Kola said in an email re­ply to ET’s queries.

“I be­lieve that th­ese ac­tions harm the cred­i­bil­ity of the startup eco sys­tem,” she wrote.

Snapdeal did not re­spond to ET’s queries seek­ing a re­sponse to Kola’s ob­ser­va­tions.

ROAD­BLOCKS

Ne­go­ti­a­tions for a pro­posed sale started in Jan­uary this year, with SoftBank meet­ing with ini­tial road­blocks from Snapdeal’s early back­ers Kalaari Cap­i­tal and Nexus Ven­ture Part­ners, who held pow­er­ful veto rights. Nexus, Kalaari and Snapdeal founders were granted pre-de­ter­mined pay­outs from the Ja­panese firm be­fore talks could progress. Af­ter get­ting Nexus and Kalaari’s as­sent, Flip­kart started due dili­gence for Snapdeal's ac­qui­si­tion in June, fi­nally mak­ing an of­fer in July.

Mean­while, Snapdeal’s other mi­nor­ity share­hold­ers who were not rep­re­sented on the board be­came rest­less with the spe­cial pay­outs. About half a dozen in­vestors, in­clud­ing PremjiIn­vest — the per­sonal in­vest­ment arm of Wipro chair­man Azim Premji — wrote two let­ters ask­ing for clar­ity on the deal and were also con­tem­plat­ing le­gal ac­tion.

An­other is­sue which cropped up

was that do­mes­tic in­vestors in Snapdeal like PremjiIn­vest had sought a stake in Flip­kart’s Sin­ga­pore-reg­is­tered par­ent en­tity, which would have vi­o­lated For­eign Ex­change Man­age­ment Act (Fema) rules, which was re­ported by ET on June13.

On July 17, Flip­kart had made a sec­ond bid for the strug­gling on­line mar­ket­place — es­ti­mated at about $850 mil­lion — two weeks af­ter its ini­tial of­fer was re­jected. As per the terms and con­di­tions of the re­vised bid, Flip­kart asked Snapdeal to set aside about $150 mil­lion of the $850 mil­lion with ap­proval of all share­hold­ers. The in­dem­nity clause had asked all share­hold­ers of Snapdeal to re­main li­able for any is­sues crop­ping up at the com­pany even 18-24 months af­ter the deal.

“It was al­ways an un­nat­u­ral deal to start with. Flip­kart was not get­ting any­thing, and none of the Snapdeal in­vestors ex­cept Nexus and Kalaari were mak­ing money,” said a per­son track­ing the de­vel­op­ments. For Snapdeal, the im­me­di­ate im­pact of the fail­ure to close the trans­ac­tion is the es­ti­mated lay­offs ofa sig­nif­i­cant por­tion of its work­force.Cur­rently Snapdeal em­ploys 1,300 peo­ple, down from 7,000 in early 2016.

This cost-cut­ting mea­sure, along with sale of as­sets like pay­ments arm FreeCharge, form part of Bahl’s Snapdeal 2.0 plan to kick­start a new phase of growth.

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