The $16-billion Gamble
SIXTEEN BILLION US DOLLARS is a lot of money to pay to take control of an Indian company. It is $4 billion more than what Rosneft and its partners paid a year ago to buy Essar Oil with its 20-million tonne refinery in Vadinar, captive power plants, a port and a network of 3,500 petrol pumps. Essar Oil was profitable but had big debt. The Rosneft-led consortium got 98.2 per cent of Essar Oil for $12.9 billion. Similarly, all three big steel plant assets being sold in the bankruptcy proceedings currently on – Essar Steel, Bhushan Power & Steel and Bhushan Steel – are likely to fetch less than $10 billion together, once the process is complete.
But Walmart was desperate enough to take control of Flipkart to pay $16 billion for a 77 per cent stake. The amount was more than anything it had paid for earlier acquisitions, more than its consolidated net income for the year and more than even its capital expenditure budgeted for its physical stores. This despite the fact that Flipkart had never posted a profit since its inception in 2007. In fact, when Walmart decided to do the deal, Flipkart had reported losses of nearly half a billion dollars for the year.
A lot of analysts felt that Walmart overpaid for Flipkart, but the Bentonville, US-headquarted retail giant, had good reasons. Despite multiple efforts, it was a laggard in e-commerce, with a market share in the US, roughly 4 per cent against Amazon’s 48 per cent of digital sales.
There was still a chance overseas but there were problems, too. In physical retail, Walmart had never found success in any other markets it had ventured into. Walmart (and for that matter Amazon) also did not have a chance of cracking China’s retail market, where Alibaba and Tencent were too deeply entrenched. India, on the other hand, was a market with unparalleled potential – organised retail was still a very small portion of the overall retail market and online retail was an even smaller portion. Also, while Amazon had entered India and was rapidly growing its operations and market share, Flipkart, along with Myntra and Jabong, still held the lead.
Walmart, therefore, had a chance of winning the online battle in India – provided it got its act right. The Bansals, who had started Flipkart, were poster boys of the Indian start-up system, but they had seen their shareholding erode because the fight with Amazon required constantly raising capital from the venture capitalists. And the VCs were getting restive – they already had put in their man Kalyan Krishnamurthy as CEO because they saw Flipkart was no longer as dominant as it used to be, and they were not averse to exiting if they got a good offer. The Walmart deal saw the VCs make a good profitable exit, while Sachin Bansal was also out of the company. Binny Bansal remained, but it was always known that his time was limited and at any rate, Walmart would take all the important decisions from now on to fix its problems.
Since taking charge, Walmart has moved fast to fix many things in Flipkart without altogether changing its growth at all costs DNA. It has tried to align systems and process in line with its own practices in the US. Will Walmart be able to fix Flipkart without losing its intrinsic strengths that made the latter the e-commerce leader in India? Our cover story looks at how Walmart is trying to do that.