Deal of the Decade
Samir Alam explores the ramifications of Walmart’s acquisition of Flipkart.com, a top Indian e-commerce portal.
Explaining the ramifications of Walmart’s acquisition of Flipkart.com
THE AMERICAN MULTINATIONAL RETAIL CORPORATION WALMART FINALLY ANNOUNCED PLANS TO PURCHASE INDIAN E-COMMERCE GIANT FLIPKART FOR USD 16 BILLION.
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.
FROM BOOKS TO BILLIONS
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.
SO, WHAT’S THE BIG DEAL?
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.
CRUNCHING THE NUMBERS
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.