The battle between online budget hotels aggregators OYO Rooms and ZO Rooms has its genesis in a failed acquisition of the latter by the former in 2016

The reverberations of a failed deal between two leading hospitality aggregators in India are refusing to die down. If the recent developments are anything to go by, the battle between OYO Rooms and Zo Rooms is set to intensify further.

Tiger Global-backed Zo Rooms (owned by Zostel Hospitality) has filed a lawsuit against bigger rival and SoftBank-backed OYO Rooms for allegedly stealing data while conducting due diligence as part of the failed acquisition.

In the complaint, ZO Rooms alleged that OYO has acquired data of employees, assets, hotel properties under the guise of accelerating the process of acquisition. While the deal collapsed midway, OYO still used its data to its advantage and to expand its business, but is now refusing to pay the dues. According to ZO, the overall incident has caused irreparable harm to ZO Rooms.

As per the petition, ZO wants OYO to deposit the revenue earned from the hotels that were acquired from it with the court and prevent it from diluting any of these assets. It has also prayed to the court to pass an order for search and seizure of OYO to retrieve the stolen data and bar the company from using any of the data. It has also petitioned the court to restrain OYO from raising any funds through equity.

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OYO Rooms, however, has denied the allegations saying it was in fact ZO which has stolen its data and other assets including laptops. “Since more than one year, we’ve been continuously inconvenienced and harassed by Zostel and its directors. They’ve used every tactic, from sending letters carrying false allegations to OYO’s management to writing to our shareholders, for intimidating and pressurizing us to submit to their unreasonable demands,” an OYO spokesperson said.

The OYO spokesperson has also mentioned that it has filed a criminal complaint against the founders of Zostel on January 16, 2018, under various sections pertaining to Criminal Breach of Trust, Cheating and Misrepresentation of data. ZO is only trying to arm-twist and blackmail OYO and its investors into getting their (acquisition) deal done without having a real business or even a binding agreement at hand and threatening us through legal routes.

“Even much prior to this, OYO has filed other criminal cases under section 379, 414, 420 and 120B of IPC and other implications under IT and Copyright Acts with the Economic Offences Wing & Cybercrime department against senior employees of Zostel for stealing data and other assets including laptops which continue to be under Zostel’s access even now and being used to its benefit,” the OYO spokesperson added.

OYO is of a view that in order to ramp up its tactics, Zostel, as a part of its counter strategy, has filed a misconceived and baseless Section 9 arbitration petition in the Gurgaon court on February 2, 2018, making false allegations against OYO, including, but not limited to, allegations around various hotel, employee and consumer asset transfer. These allegations relate to a long expired and non-binding term sheet.

“It is absolutely false to suggest that OYO benefited from talks of the deal since the ZO business had been faltering at that stage. There was also no response to a list of issues identified during our diligence process, including significant liabilities and unpaid dues as well as undisclosed contingent liabilities. Getting into a deal with this background would have been harmful for our reputation and our business,” said an OYO statement.

“OYO ultimately saw little value in Zostel’s business and there was a significant loss of trust owing to issues mentioned in our previous statement. In any event, while they claim that they have always been willing to do the deal but they shut down the app and website giving neither us nor their customers or owners any prior notice thereby making it impossible for Zostel to ever effect any customer migration leave alone a smooth business transfer which was key to the deal discussion.”

The battle between two VC darlings has its genesis in a failed acquisition of ZO by OYO in 2016. The funny part is that SoftBank had announced the acquisition of ZO Rooms by its portfolio company in an earnings report in February 2016, but a year later news emerged that the deal actually collapsed midway and that OYO ended all discussions on the matter. The company however did not cite the reasons for the deal failure.

Zostel was started in August 2013 as a chain of backpacker hostels for young travellers. In 2015 it entered the budget hotel market, competing directing with OYO.

OYO was founded in 2014 by Ritesh Agarwal, a college drop-out and geek, who plunged into entrepreneurship at the age of 17. He previously founded Oravel Stays, a short-stay accommodation portal, which was funded by VentureNursery, DSG Consumer Partners and Lightspeed. In mid-2014, Oravel was shut down as it failed to scale as expected, and Agarwal started OYO.

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OYO operates in more than 170 Indian cities including Delhi, Gurgaon, Mumbai, Bangalore, Hyderabad, Goa, Chennai and Kolkata. These include major metros, regional hubs, top leisure destinations, as well as pilgrimage towns. In January 2016, OYO expanded to Malaysia.

As per an Economic Times report in April last year, OYO is on the verge of closing a US$250 million funding led by its existing investor SoftBank, at a post-money valuation of US$850 million.

OYO Founder and CEO Ritesh Agarwal

More than a year ago, OYO Rooms secured US$100 million in its fifth round of funding from SoftBank and an undisclosed international sovereign fund, with participation from existing investors Sequoia Capital, Lightspeed Venture Partners, Greenoaks Capital, DSG Consumer Partners and Venture Nursery. This came in a year after the Japanese firm injected an equal amount into the startup.

Earlier, OYO had secured US$24 million funding led by Greenoaks Capital Partners in May 2015. Prior to that, it received US$650,000 from DSG Consumer Partners and Lightspeed in May 2014.

Last year, serial entrepreneur and Indian startup expert Sumanth Raghavendra wrote a chilling article about OYO, in which he said OYO is equivalent to a Ponzi scheme. In his opinion, the budget hotel aggregator exaggerated the numbers and initiated the steps that took them down the Ponzi rabbit-hole.

In the second part to the report, Raghavendra also made some serious allegations that the SoftBank funding OYO announced in early 2016 did not actually happen. A few days later, Agarwal hit back at Raghavendra through an internal email to OYO’s employees, saying that calling it a Ponzi scheme is an insult to more than 2,200 of its employees.

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