Written by Pragya Chandra pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) offered by Lawsikho as part of her coursework. Pragya is a Legal Advisor with Portfolio Financial Services Ltd.
The year 2018 has been an incredible year in terms of India and its placing before the World as the biggest potential for growth in almost all of its sectors. Recently, India climbed 23 points in the World Bank’s ease of doing business index to 77th place, becoming the top ranked country in South Asia for the first time and third among the BRICS. In the last two years the country has climbed 53 notches, a performance matched in the past only by Bhutan.
India has the distinction of having the second largest user base in the world, after China offcourse. With approximately 475 million users, as of July, 2018, which conspires of only 40% of its population ; India has emerged as one of the largest upcoming online retail growth market. This has lead to substantial investments in supporting infrastructure and innovative and game changing business models.
Amidst all of this, the world’s biggest e-commerce deal occured in India when Walmart acquired Flipkart for $16 billion, a valuation of over $20 billion. Walmart owns around 77% of the Bengaluru-based company in what is also the largest buyout for the US firm. Moreover, the Flipkart-Walmart Acquisition has helped India establish its own place before the world as a secure and flexible option to business ventures and inter-country trading with vast scope of potential and immense growth.
The major leaders in the e-commerce business in India are :
|$ 2 Billion||AMAZON|
|$ 1 Billion||FLIPKART|
|$ 627 Million||SNAPDEAL|
|$ 50 Million||MYNTRA|
|$ 33 Million||BIG BASKET|
|$ 27.5 Million||JABONG|
|$ 21 Million||URBAN LADDER|
|$ 15 Million||FIRSTCRY|
|$ 15 Million||LIME ROAD|
|$ 15 Million||PEPPER FRY|
There have been quite a many speculations by various analysts, marketing gurus and research honchos, as to what factors and indicators might have led to this scale of transaction, resulting to bringing India at a prominent place on the International Forums. But very few have genuinely listed points which might have led to this mega Acquisition which left the whole world startled and set out a blazing fire of “change” in its truest sense. This Article focuses on the Walmart’s acquisition over Flipkart and the reasons why they have invested in Flipkart.
Let us have a look at Deal.
Details of the Deal
ACQUIREE – Flipkart Pvt. Ltd.
ACQUIRER – Walmart Inc.
Here are the key facts about Flipkart:
■ Walmart goes back to 1962, when its founder, Mr. Sam Walton opened its first store at Walnut Street, Rogers, Arkansas, United States of America. After that, the rest has been history.
■ Flipkart was founded in 2007 in Bengaluru, Karnataka by Sachin Bansal and Binny Bansal. Both the founders share the same alma mater – IIT, Delhi and were former employees of Amazon.
■ In 2011, Flipkart domiciled to Singapore, as it looked to woo foreign investors to fund rapid growth.
■On January 15, 2016, Walmart announced it would close 269 stores in 2016, affecting 16,000 workers. One hundred and fifty-four of these stores earmarked for closure were in the U.S. (150 Walmart U.S. stores, 115 Walmart International stores, and 4 Sam’s Clubs). Ninety-five percent of these U.S. stores were located, on average, 10 miles from another Walmart store. Post this, Walmart has been rapidly investing in various e-commerce websites/forums like Jet.com, Moosejaw, Bonobos, etc.
■ The first billion-dollar Indian e-commerce company, Flipkart sells 8 million products across 80 plus categories. It has 100 million registered users, 100,000 sellers, 21 warehouses, 10 million daily page visits in 2018.
■ Flipkart Group’s consolidated loss attributable to owners of the company in fiscal 2017 widened to Rs 8,770 crore, from Rs 5,216 crore a year earlier. Consolidated revenue jumped 29% to Rs 19,855 crore in fiscal 2017.
■ In April 2017, eBay announced that it would sell its Indian subsidiary eBay.in to Flipkart and make a US $500 million cash investment in the company. eBay promoted that the partnership would eventually allow Flipkart to access eBay’s network of international vendors, and vice versa, but these plans never actually came to fruit. In July 2017, Flipkart made an offer to acquire its main domestic competitor, Snapdeal, for around US$700–800 million. It was rejected by the company, which was seeking at least US$1 billion.
■ Walmart wraps up Flipkart and acquires Flipkart for $16 Billion, valued at over $20 Billion. Walmart have acquired a stake of around 77% in Flipkart.
■ Japan’s SoftBank Group Corp. owns a fifth of Flipkart through its Vision Fund. SoftBank expected to sell its whole stake in the Walmart deal, Reuters reported last week.
■ Early investors New York-based hedge fund Tiger Global and US private-equity firm Accel Partners will sell a majority of their stakes to Walmart.
■ Other investors in Flipkart include the founders and Napsers Ltd, China’s Tencent Holdings Ltd, eBay Inc, and Microsoft Corp.invested $1.4 billion last year.
■ Flipkart’s existing management team will continue to lead the business. Tencent Holdings Limited and Tiger Global Management LLC will remain represented on the Flipkart board, in addition to independent board members, and will be joined by new members from Walmart. The board will work to maintain Flipkart’s core values and entrepreneurial spirit, while ensuring it has strategic and competitive advantages.
■ Walmart’s investment includes $2 billion of new equity funding to help accelerate the growth of the Flipkart business. Both companies will retain their unique brands and operating structures in India.
Reasons why Walmart decided to invest in India
Let us have a look at the reasons why Walmart has invested in Flipkart :
The Common Rival – AMAZON.COM, INC
● The world of Business is surrounded by cut-throat competition full of rivalries and competition. The Walmart and Amazon Rivalry has a long history going back to the very inception of Amazon, Inc.
● One of the factors which was common between Flipkart and Walmart was its competition with Amazon Inc.
● While in India, Flipkart was in business, 2 years ago one of the main questions was whether Flipkart was going to sustain in the Indian E-Commerce Markets.
● Whereas, back in the United States of America, Walmart has closed numerous stores and has been aggressively focusing on the online retailing of goods.
India and USA – the Leading Alliance
● It is not news, that after the current political status of India and the initiatives taken by India towards ease of business, digitization of the country, etc has increased the potential of India manifolds.
● India is now being looked at as a country with huge prospects and would yield great returns on investments.
● According to Google India Research, by 2021 India is expected to generate $100 billion online retail revenue out of which $35 billion will be through fashion e-commerce. Online apparel sales are set to grow four times in coming years.
● After China, India is the second most populated country in the world. Since, China has very closed economic practices, India is the best option at this point of juncture to invest as the potential of online retailing is the biggest and most unexplored per se.
Very few people in India know Walmart in its entirety and that they have been showing their interests in the Indian Markets since the past 10 years now.
● The FDI Laws in India does not allow foreign companies to open front-end stores in India; which was the biggest roadblock for Walmart to sweep in the Indian Markets.
● Upon going through the following table, you will be able to see the different slabs of FDI allowed :
● It is clear from the above referred table that the Investment Allowance in ‘E-Commerce’ is 100%, which Walmart has taken advantage of.
● Looking at the past stints of Walmart, in order to enter the Indian Markets, Walmart entered in Joint Venture with Bharti Enterprises, but in vain. Various political and financial circumstances led to the failure and severance of all the ties between Walmart and Bharti Enterprises which also led to the downfall of the public image of Walmart.
● Besides the US, Walmart is pumping investments in e-commerce in China, Mexico, and Canada. In China, where the retailer has over 440 stores, it bought a 5% stake in JD.com, the second-largest online retailer in the country, in 2016. India has now made it to this list.
● “Walmart needed Flipkart possibly more than Flipkart needed Walmart,” said Yugal Joshi, practice director at management consulting and research firm Everest Group. “It didn’t have any shortage of funds and Softbank and others were really invested. It is a strong sign that a global giant found an Indian startup so important for its own online survival in the online market.”
● For people who had been closely monitoring Walmart and its activities, it was not at all a surprise that Walmart would take this huge leap from brick and mortar stores to coming into the business of e-commerce.
All’s well that ends well – a win-win situation for both
● One of the major questions which popped up in almost everyone’s minds upon listening to the news was – WHY FLIPKART IN INDIA? Especially since, Flipkart was nothing but losses and few years ago, the survival of Flipkart as an entity was also a question.
● Flipkart’s losses in FY 2017 had increased by 68% to Rs 8,771 crore, according to documents sourced from data intelligence platform Paper.VC. This was primarily on account of a five-fold increase in finance costs to Rs 4,308 crore, driven by a fall in valuation. Flipkart’s valuation fell from $15.2 billion in 2015 to $11.6 billion in April 2017, when it raised capital in a round led by Chinese internet conglomerate Tencent.
● Under such circumstances, why was Flipkart being sold as hot cakes and that too at such ground breaking finances?
● The answer is that Flipkart has the biggest Client Base of e-commerce customers in India. It has beaten Amazon, Snapdeal, PayTM and all other e-commerce prospects single handedly when it comes to approach of clients and in terms of connect to the masses.
● Flipkart has 100 million registered users, making it the first online marketplace in India to reach this milestone. A press statement from the company said Flipkart has become the first company to reach this milestone in a single country outside the US and China.
● So, to put it in words, Walmart has not merely in a Company with huge e-commerce potential but, they have also gained their access to the Database of Indians which shall provide Walmart a better platform (served in a platter), to reach the masses for whatever product/service they have to offer.
● For instance, if Walmart wishes to sell a Goat in the Indian Online Markets, they would have a better access to prospect buyers and thus, greater chances of sale.
● Thus, it is a win-win situation for all.
In order to really get a good understanding of why Walmart really invested in Flipkart, other than the financials, it is very important to analyze the psych and ideation of the parties involved in the deal. It generally is a four step procedure before any business entity takes any major step to restructure its setup – Ideation; Finding a Prospect; Weighing the Pros and Cons; and finally, execution & closure of the deal. The same has been followed in the Flipkart – Walmart Deal.
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