Walmart has become the largest shareholder in Flipkart by an acquisition of 77% of the company for $16 billion. The deal will also include a fresh investment of $2 billion to fund the growth plans of the company and to take on its rival Amazon. This being the world’s biggest e-commerce deal leaves the two behemoth companies, Walmart and Amazon in the Indian market as the retail competitors.
“India is one of the most attractive retail markets in the world, given its size and growth rate, and our investment is an opportunity to partner with the company that is leading the transformation of e-commerce in the market,” said Doug McMillon, Walmart’s president and chief executive officer, in a statement. He also talked of India’s benefit in obtaining standard and affordable goods for customers, creating new skilled jobs and fresh opportunities for small suppliers, farmers and women entrepreneurs with their investment.
Doug Mcmillon, President and CEO of Walmart made a bold move against investor confidence
With the investment, Flipkart will leverage Walmart’s omnichannel retail expertise, grocery and general merchandise supply-chain knowledge and financial strength. Walmart plans to link up with 5-6 million kirana stores to help them modernize and be a part of the overall supply chain.
While Walmart and Flipkart will leverage their combined strengths, they will maintain distinct brands and operating structures. “It is our intention to just empower you and let you run — speed matters, decisiveness matters,” McMillan told Flipkart employees in a town hall meeting.
Sachin and Binny Bansal started off Flipkart as an online bookstore in 2007
Sachin Bansal, co-founder of Flipkart will exit completely by giving away his entire 5.5% stake for a billion dollars. Binny Bansal remains invested as the new executive chairman of Flipkart. The remaining 23% in Flipkart will be held by co-founder Binny Bansal and the existing shareholders: Chinese Internet conglomerate Tencent, investment firm Tiger Global and software firm Microsoft Corp, provided that Softbank decides to let go of its stake which it plans to hold onto due to tax implications on short terms investments for at least another 6-12 months (they had invested $2.5 billion in August 2017).
Masayoshi Son, CEO of Softbank might hold back on diluting his stake in Flipkart for now
Amazon has also tried its best in acquiring Flipkart thrice before. It offered $500-700 million to Flipkart in the year 2012 before it has launched operations in India. It bid again at $8 billion offer in 2015 and its latest attempt was during the negotiations of Walmart-Flipkart, by offering a deal valuation of $22.5 billion but Flipkart’s board decided to go ahead with Walmart due to several cited and uncited reasons.
This move was extremely important for Walmart with Walmart’s international acquisitions not receiving much attention, slowing offline sales and fierce competition from several quarters. Moreover, Walmart has been having a tough time to get back into the game with it losing major market share to Amazon in the United States, failed in building a growing online marketplace of its own and selling off its British acquisition Asda to Sainsbury PLC. Even China is playing hard on them with their purchase of an unprofitable, second-tier online marketplace that’s trying to catch up to Alibaba. Likewise, is Brazil, that is just out of a recession and political instability forcing store shutdowns and Japan where their Seiyu Chain is far behind market leaders.
A snapshot of the equity sold by various stakeholders to Walmart
The investment saw Walmart’s stock plummet on Wall street wiping $10 billion of their market capitalization, mainly due to lack of investor confidence in Flipkart’s profitability which is not expected for some more years and the belief that the India e-commerce market is still in a nascent stage by global standards, i.e. 100 million customers in a country with nearly 1.3 billion people. Nevertheless, this is a move that will propel Walmart into the technological revolution and improve their bottom line in the long run. This will be brought about in India with a rapidly increasing smartphone user base and higher internet penetration.
The only option left for Walmart is to make forays into India, the largest market after China. Walmart’s CEO, Doug Mcmillon is also keen to meet key government officials in Delhi to allay any fears of a backdoor entry into India. India has always been an important market for the Arkansas based company but its business remained confined to a ‘cash and carry’ wholesale business due to restrictions on foreign investment. Even their deal with Bharti Enterprises in the past did not take off. They always have been desperate to globalize their business and build their own technological prowess. Their acquisition of Jet.com, Shoebuy and Bonobos has provided mixed results. So, the Flipkart deal comes at an opportune time although a little late, establishing two massive players, Amazon and Walmart, fighting against each other on Indian ground.
Will Walmart become the Alibaba of India? How would Jack Ma respond to this move?
While the startup world has a successful precedent to look up to in the success of Flipkart’s acquisition, a few are sceptical about the whole thing. “I would have liked a native company to go on and become the Amazon and Alibaba of India. But given the capital needed and the lack of capital in India and given that there is no moat or protection from the regulatory perspective, we have to look at the next best option,” said Kalahari Capital managing director Vani Kola.
India has become the hotbed for investment due to ease of doing business, recent political stability and pro-business moves by the government as compared to its neighbour, China. Even the Chinese have been actively investing in several Indian startups in the tunes of millions of USD. In such a scenario, it makes an absolute scene for any multinational corporation to make investments and capture market share at the earliest. Walmart has made the right move but is it enough to battle the already established Amazon? CEO Jeff Bezos of Amazon had committed $5 billion to India in the past and has already invested a large chunk of it. With this turn of events, the Indian e-commerce industry can expect a lot more investments to gain control over the consumer habits of the world’s largest democracy!