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Freecharge, Myntra, UrbanSpoon, Jabong, Jaguar Land Rover, Hutchison Essar, Corus have one thing in common, all of them for one reason or the other had to go through the throes of acquisition by a bigger company.
Walmart through its recent decision to acquire Flipkart has set a cat among the pigeons. Indian e-commerce industry is now poised for one of the biggest showdowns in the history, where two of the biggest American conglomerates, Walmart and Amazon are staking their claim on the fat Indian e-commerce pie. With a single stroke, Walmart has set its intentions in motion. The foray of Walmart in the Indian market had become a political hot potato in the past. But, this time Walmart will not be at the mercy of Political brinkmanship or Bureaucratic quagmire. Walmart has set its house in order and will make up for the lost business opportunity in the past.
Mergers and Acquisitions
Mergers and Acquisitions are two interrelated terms which are naively used interchangeably. According to Investopedia, Mergers, and acquisitions (M&A) refers to the consolidation of companies or assets through various types of financial transactions. M&A can include a number of different transactions, such as mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions. In a merger, the boards of directors for two companies approve the combination and seek shareholders’ approval. After the merger, the acquired company ceases to exist and becomes part of the acquiring company. In Acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or legal structure.
Merger and acquisition in India
Merger and acquisition are fairly new concepts in India. Until the late 1990s, the concept was virtually out of bounds for companies because of the Monopolistic and Restrictive Trade Practices Act, 1969. The act apparently pressurized companies to run from pillar to post to get the permission for mergers and acquisitions. This era in the Indian context was known as License Permit Raj, where the palms had to be greased to set the ball rolling. However, the Competition Act introduced in 2002 changed the focus from curbing monopolies to promoting competition leading to more transparency. Merger and acquisition are an important strategy to restructure the company and stay relevant in the market. M&A is the shortcut for companies to retain the optimum share in the market. M&A are potential tools to tap into upcoming and thriving markets. M&A also facilitates tax benefits, access to innovative technologies and furthers Economies of Scale. In the Flipkart-Walmart (FlipMart) deal, Economies of scale and tapping into a thriving market seems to be the major concern for Walmart.
Flipkart: How it all began?
The saga of e-commerce in India dates back to the year 1999 when K Vaitheeswaran founded ‘fabmart.com’. However, e-commerce industry went in full swing in 2007 when Sachin Bansal and Binny Bansal started Flipkart. Both of them had worked for, Seattle based company, Amazon previously. They drew from the experience in Amazon and Flipkart became the brainchild of these two IIT alumni. Flipkart gradually expanded its business with its many acquisitions along the way. According to an estimate Flipkart was valued at $17.7 billion until May 2018 and had a 39% market share, 8% more than that for Amazon, of the $30 billion the Indian e-commerce sector. Flipkart had previously acquired Jabong and Myntra and buttressed its position in the fashion e-tail sector, where it was facing stiff competition from Amazon.
The India e-commerce industry is pegged to grow to $200 billion by the year 2026. The frenetic pace at which the industry is growing rung bells in the ears of Amazon and Walmart. Sources in print and electronic media had even speculated that Amazon made a more lucrative offer to acquire the majority stake in Flipkart. But, Flipkart went with Walmart as the founders and management got a better deal in terms of the bigger stake and greater say in the operations of the company. Walmart will acquire 77% share at the cost of $16 billion in Flipkart. This is a paradigm shift as Walmart was losing its customers to Amazon in the US. This customer shift was majorly from the brick and mortar retail stores to e-tail stores. This venture of Walmart will bring it back in the game where developing markets have immense potential and can be a game changer for its international operations.
Walmart is an Arkansas based US multinational retail company which runs a large chain of hypermarkets and grocery stores. It was founded by Sam Walton in 1962 and is the world’s largest company by revenue of $486 billion. It is a family managed company which is the largest private employer in the world.
Walmart had entered the Indian market almost a decade back in a joint venture with Bharti group but had to restrict its operations to cash and carry stores due to procedural reasons. At that time, there were heated debates in the Parliament regarding Foreign Direct Investment (FDI) in Multi-brand retail. This policy was opposed tooth and nail by the opposition then. Walmart was shown the door to protect the mom-and-pop stores of our locality. However, this time around Walmart has left no stones unturned and is almost on the brink of making a mark in the industry in a big way. Walmart will slowly but steadily enter the customer’s wallet with this acquisition.
How will the deal affect the Indian economy?
The deal has opened up the Pandora’s box for the Indian economy. Experts have mixed views about the acquisition. India currently doesn’t have any rule for the e-commerce industry. Therefore, these multinationals are treading in unchartered territory which is fraught with innumerable, unseen and unheard complications. As seen in recent times e-commerce sites have been doling out unreasonable sale offers to customers at frenetic rates resulting in enormous cash burn for these e-tail companies. Flipkart has recently reported a loss of INR 24,000 crores. Moreover, such deals will create an uneven level playing field for large multinationals, result in predatory pricing and can also lead to loss of funding. The sellers will be the worst group to suffer as Walmart will have its Supply chain paraphernalia in place once the deal is finalized. Also, these sellers have been kept in the dark about the deal as of now, so they are jittery about the FlipMart bonhomie. The deal will also bring the taxmen to work as it might involve transactions where a foreign firm is acquiring an Indian company through an offshore transaction.
Although Flipkart’s cash burn is raging presently, the rating agency Moody has termed the acquisition ‘credit positive’. The growing Indian middle class, penetration of smartphones will be a cog in the wheel of the booming e-commerce industry in future. The online shopping divisions are currently hinged around fashion and electronics segments. New categories of food and groceries are still untapped segments. Walmart already has expertise in these segments, and Walmart is, therefore, drooling over the FlipMart deal. Its expertise will go a long way in creating a niche for this e-tail giant. The deal has also rung alarm bells for Paytm, handcrafted in India but financed by Chinese e-tail giant Alibaba. However, this will further increase the competition among the e-tail rivals, but customers will be the final benefactors.
Whatever be the consequences of this deal, if it’s a win-win situation for customers in India, Walmart will be welcomed with both hands. But, Indian customers are too wedded to discounts and sale offers. Therefore, their loyalty will be difficult to earn and even more difficult to retain when they are spoilt by ‘Big Billion Sale’ like offers. However, it remains to be seen how these businesses will remain profitable in case of these extreme discount offers. Currently, these e-tail giants control only 1-2% of the retail market in India. Therefore, they have to up their ante to compete with the brick and mortar stores in our locality. It will be anybody’s guess how they are going to tackle this skewed retail market distribution. Additionally, given the scope of omnichannel services and the expertise of these companies to seamlessly transition among these services, provide an edge to the e-commerce business. These companies are also investing hugely in Artificial Intelligence and machine learning. Their expertise in these will benefit the Indian market in a great way and will also expand their business by luring customers by recognizing their shopping activity. E-commerce is the future of retail in India and will bring extraordinary change in the Indian market. The coming years will see innumerable e-commerce innovations, simplified and exciting shopping experience for the customers.
“E-commerce sites have truly democratized our e-tail space; they have given us the power of “CHOICE”.
*The article was originally published in the second edition (June 2018) of With The Coffee (Click here to download your free copy of the magazine).Would love to connect with you on social media!