Deal of the Decade

Samir Alam ex­plores the ram­i­fi­ca­tions of Wal­mart’s ac­qui­si­tion of Flip­, a top In­dian e-com­merce por­tal.

Apparel - - Contents -

Ex­plain­ing the ram­i­fi­ca­tions of Wal­mart’s ac­qui­si­tion of Flip­


Af­ter months of ru­mours and slow-burn­ing buzz, on May 9th 2018, a flurry of busi­ness news grabbed ev­ery­one’s at­ten­tion. The Amer­i­can multi­na­tional re­tail cor­po­ra­tion Wal­mart fi­nally an­nounced plans to pur­chase In­dian e-com­merce gi­ant Flip­kart for USD 16 bil­lion. The fi­nal deal took weeks to pol­ish but ended with Wal­mart ac­quir­ing a 77 per cent stake in Flip­kart and deny­ing long stand­ing com­peti­tor Ama­zon the chance to merge with its In­dian coun­ter­part. This marks a sig­nif­i­cant mo­ment in In­dian busi­ness, par­tic­u­larly in the age of dig­i­tal start-ups, as this is per­haps the largest deal of its kind. But per­haps, what is even more in­ter­est­ing is the jour­ney Flip­kart has taken to ar­rive at this point.


Today, Flip­kart is touted as a lead­ing player in the e-com­merce seg­ment, with a va­ri­ety of prod­ucts on its plat­form – sell­ing ev­ery­thing from elec­tron­ics to fash­ion items. How­ever, it is im­por­tant to re­mem­ber that the com­pany be­gan only 11 years ago as an on­line book­seller. With a gen­tle start in 2007, and less than USD 6,000 in seed cap­i­tal, the com­pany op­er­ated from a sim­ple 2BHK apart­ment in Ben­galuru.

Flip­kart Pvt Ltd. was founded in 2007 by Sachin Bansal and Binny Bansal (who are in­ci­den­tally not re­lated), both former Ama­zon em­ploy­ees. At a time when in­ter­net pen­e­tra­tion was lim­ited and wide­spread smart­phone pro­lif­er­a­tion was still far from a re­al­ity, the duo bet on the po­ten­tial of dig­i­tal trans­for­ma­tion in the coun­try. As the dig­i­tal in­fra­struc­ture of the na­tion grew, the com­pany con­tin­ued to drive for­ward a va­ri­ety of ser­vices, mov­ing be­yond books and other prod­ucts into af­fil­i­ated op­er­a­tions such as lo­gis­ti­cal sup­port and me­dia.

The com­pany started off with just 20 or­ders in the first year and grew to 100 or­ders a day in the next. The com­pany has, since then, been val­ued at more than USD 21 bil­lion, gen­er­at­ing more than USD 3 bil­lion in rev­enue and em­ploy­ing 30,000 peo­ple. Flip­kart Pvt Ltd. has gone through a rad­i­cal jour­ney of growth and in­no­va­tion that has prac­ti­cally given birth to In­dian e-com­merce as we know it.


Within two years, the com­pany’s rev­enues went from USD 1 mil­lion in 2009 to USD 75 mil­lion in 2011. As In­ter­net pen­e­tra­tion widened across the na­tion, many new com­peti­tors emerged in the mar­ket, but Flip­kart con­tin­ued to lead the charge in the In­dian e-com­merce space, buy­ing out many com­peti­tors and driv­ing others to ob­so­les­cence. By 2016, the rev­enue growth rate of the com­pany reached about 50 per cent at its peak.

From hav­ing two full time work­ers, to 150 work­ers in two years, all the way to over 30,000 em­ploy­ees across the coun­try, Flip­kart is an icon of the In­dian start-up cul­ture. Over the course of its rise, the com­pany has crossed a num­ber of mile­stones and achieved a high sta­tus amongst In­dian start-ups look­ing to make it big. Flip­kart has at­tracted bil­lions in in­vest­ment fund­ing from in­ter­na­tional com­pa­nies and ven­ture cap­i­tal firms such as Ten­cent, eBay, Tiger Global, and Mi­crosoft, mak­ing it the envy of the start-up world in In­dia. With its sale to Wal­mart, cel­e­bra­tions are al­ready un­der­way within the Flip­kart com­mu­nity, as ESOPs are achiev­ing im­mense value, turn­ing work­ers into mil­lion­aires as they sell their share op­tions in the com­pany.

Per­haps not since Sabeer Bha­tia’s sale of Hot­mail to Mi­crosoft for USD 400 mil­lion in 1998 has an In­dian start-up com­pany cap­tured the at­ten­tion of the world. The In­dian e-com­merce in­dus­try has al­ways shown an op­ti­mistic trend for global play­ers, which is what lead to Ama­zon’s en­try in 2012-13. Now, with the in­dus­try be­ing es­ti­mated as be­ing over USD 30 bil­lion in size today with pro­jec­tions for it to cross USD 200 bil­lion by 2026, we can ex­pect the up­com­ing clash be­tween Wal­mart-Flip­kart and Ama­zon to define the e-com­merce land­scape.


As Wal­mart and Flip­kart now wait for reg­u­la­tors to sign off on this deal, we can be­gin to as­sess what im­pli­ca­tions this will have for the fu­ture. The deal it­self has been highly con­tro­ver­sial, with last minute changes and rev­e­la­tions. For ex­am­ple, the big­gest ob­sta­cle to the 77 per cent own­er­ship came from two fronts - Soft­Bank and Ama­zon. As the trade was be­ing ne­go­ti­ated, Soft­Bank, as a 21 per cent stake­holder in­vestor in Flip­kart, was the last piece of the puz­zle.

The global bank­ing and in­vest­ment firm con­sented to sell its share to Wal­mart and is ex­pected to turn its USD 2.5 bil­lion in­vest­ment into over USD 4 bil­lion very eas­ily. And while fi­nal fig­ures are still to be re­leased, this was an un­usual move by Soft­Bank, which typ­i­cally holds onto its in­vest­ments for an av­er­age of 13-plus years.

Many spec­u­late that the rea­son for Soft­Bank’s will­ing­ness to liq­ui­date its hold­ings in Flip­kart is so that it may fo­cus on its other In­dia-based e-com­merce in­vest­ments - PayTM and PayTM Mall. As a share­holder in Flip­kart, Soft­Bank was lim­ited to only USD 500 mil­lion in in­vest­ments to th­ese com­pet­ing plat­forms, but now as it ex­its Flip­kart, we can ex­pect to see PayTM ben­e­fit from new fund­ing and in­vest­ment.

The other ma­jor piece of this deal was the com­pe­ti­tion Wal­mart faced from Ama­zon. While, the global e-com­merce gi­ant was Flip­kart’s num­ber one com­peti­tor in the In­dian mar­ket, there was a clear pos­si­bil­ity that it would take up Flip­kart’s will­ing­ness to sell, and ac­quire the In­dian com­pany. How­ever, it ap­pears that while the Flip­kart sale was im­mi­nent, it was not mo­ti­vated by lack of fund­ing, which al­lowed them a free choice in choos­ing whom to sell to, and Ama­zon was not on their list. Af­ter fierce bid­ding be­tween Ama­zon and Wal­mart, Flip­kart fi­nally opted for Wal­mart which also gives ac­cess to the Google par­ent com­pany Al­pha­bet to in­vest in the deal down the line.


While some be­lieve that this deal will hurt Ama­zon’s In­dian mar­ket share by up to 32 per cent, others are of the opin­ion that Ama­zon’s role in the bid­ding war was a clever ploy to in­flate the buy­ing price for Wal­mart. As a re­sult, this would slow down Wal­mart’s and Flip­kart’s growth in the long run, al­low­ing Ama­zon to con­tinue push­ing a com­pet­i­tive edge. When it comes to the bare num­bers, this the­ory holds some wa­ter. De­spite Wal­mart’s scale and success, the com­pany is clearly ex­pe­ri­enc­ing a slow growth curve with sta­ble prof­itabil­ity. In con­trast, Flip­kart has con­tin­ued to demon­strate grow­ing rev­enue year af­ter year, but with ex­tremely low prof­itabil­ity.

In fact, Flip­kart has con­sis­tently burnt through bil­lions in cash for years with no real in­come to show for it. Since 2008, Flip­kart has gone from a rev­enue of USD 593,000 in 2008 to USD 2.94 bil­lion in 2016, but its net in­come has trended in losses from USD 222,222 to USD 1.3 bil­lion dur­ing the same pe­riod. In the last 11 years, the com­pany has spent most of its USD 7 bil­lion in in­vest­ments, sim­ply ex­pand­ing its reach and grow­ing with­out ac­tu­ally gen­er­at­ing any real prof­its. As a re­sult, this could ei­ther mean that Ama­zon has clev­erly avoided a prob­lem and positioned it­self to win in the long run, or that Flip­kart is sim­ply ready for old-school lead­er­ship from Wal­mart, who will be able to lever­age the mas­sive growth in­fra­struc­ture of Flip­kart in In­dia and turn it to prof­itabil­ity fast. It’s hard to pre­dict but we can cer­tainly ex­pect big changes, as Wal­mart has had plans for the In­dian mar­ket for decades, and only now gained the chance to break into the scene.

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