Mergers & Acquisition, the game of consolidation The Flipkart-Walmart Saga

Introduction

Mergers and Acquisitions are transactions in which the ownership of a company is either consolidated with or transferred to other entities. In acquisitions, a new company is not formed. Instead, the assets of the company are transferred to the acquirer and the smaller company is absorbed in it. In mergers, two companies combine with each other on mutually agreed terms and become partners in the new joint venture. Mergers and Acquisitions are a crucial corporate strategy adopted by organizations for their growth and sustenance. Multiple reasons can be attributed to M&As being the pivot of the businesses. The whys and wherefores range from pre-emptive motives like expanding the market power, ensuring efficiency gains to corporate governance motives such as correction of the internal inefficiencies and rectifying capital market imperfections. Especially, M&As are projected to be the culmination point in the life-cycle of start-ups. The entrepreneurial ventures are presumed to start with the seed capital and end in M&As.

The following statistic shows the value of Mergers and Acquisitions (M&A) worldwide from 2003 to 2017 and a prediction for the year 2018. The value of global Mergers and Acquisitions deals in 2007 amounted to 3.66 trillion U.S. dollars and it was predicted to go up to 4.4 trillion U.S. dollars by the end of 2018.


Fig. 1 Value of Mergers and Acquisitions (M&A) worldwide from 2003 to 2018 (in billion USD)
(source: http://www.statista.com)

Objective

The motive of this study is to understand different facets of the M&A deal between the World’s biggest brick and mortar and India’s largest e-commerce company. This study aims at establishing a comprehensive review of the acquisition by analyzing the inception, growth, challenges faced, and the measures taken by both the companies from time to time. This study intends to answer how Flipkart rose to become billions of dollars’ worth a company in a decade’s time. It explores why Flipkart had to sell 77% stake to Walmart. Moreover, it ferrets out what made Walmart make its biggest acquisition in India. It discovers how the dynamics of the acquired company changed in terms of investors, management, and their market capitalization & strategies. Additionally, it fathoms out the impact that the deal had on the Indian e-commerce market and assess what its future looks like.

The rise of Flipkart & its business model

Fig. 2 Flipkart Life-cycle

Century after century, entrepreneurship has deepened its roots across the world. In India, 83 percent of the workforce would like to be an entrepreneur (Randstad Workmonitor survey,2017). This comes out to be higher than the global average of 53 percent. Flipkart is yet another brainchild of entrepreneurial minds of India. It was founded by two burgeoning businessmen, Sachin Bansal and Binny Bansal, both hailing from an e-commerce giant, Amazon. This venture was started in 2007 as an online book reseller with the seed money of INR 400k. By 2008, they were running only 100 orders a day. As they moved forward, they began to become progressive and started focusing on expanding the offered product line and acquiring companies. In this pursuit, Flipkart offered some unprecedented services and took novel moves to establish itself in the market. After Indiaplaza, Flipkart was the first e-commerce company to offer COD for payments, which is highly preferred in India. Furthermore, they worked on the search engine optimization of Flipkart because of which Flipkart appeared on top of the google and yahoo search engines. This gave more visibility to the Flipkart products and made it popular among the masses. The first round of Series A funding of $1 million to $700 million private placement in mid-2015, led to its whooping valuation of $11 billion and becoming the “Amazon of India”.

Flipkart and Amazon have been at loggerheads with each other to gain competitive advantage and eventually acquire a larger market share. Since the time Amazon has entered into the Indian market, it has given out myriad sales to swell its customer base by selling at lower costs. To compete, Flipkart has given out sales from time to time and absorbed the losses. Nonetheless, it made further investments and acquired Myntra in 2014 in a $300 million & Jabong in 2016 in a $70 million deal. This intensified the onus on the loss-making company and many investors began to withdraw their stakes. This is the underlying reason for the Flipkart-Walmart deal to materialize.

Fig. 3 Pre-acquisition percentage of past investors
(Source: www.ventureintelligence.com and The Hindu)

The speculation of Flipkart falling in the hands of foreign company was refuted by the fact that the foreign shareholdings in Flipkart were much higher even before the Flipkart-Walmart deal took place. The Indian shareholdings were only a few percent even before the deal. Though management lied in the hands of Sachin and Binny Bansal, but they were only minority shareholders. Consequently, the scenario of shareholding in Flipkart didn’t change much in terms of the foreign and domestic stakes.  

Introduction to Walmart

With a revenue of over $500 billion in 2018, Walmart is the largest company by revenue in the world. Walmart was conceptualized and started by Sam Walmart in 1962. Since its inception, it has taken over many discount stores and franchises. It has covered most of the U.S. market which is leading it to a saturation and a slow growth. In pursuit to increase its growth rate, Walmart is making more acquisitions and getting into newer & unexplored markets.

Walmart’s entry into India

Walmart entered India in November 2006 by announcing a joint venture with Bharti Enterprises. Due to the policies in India, foreign corporations weren’t allowed to enter the retail sector directly. Hence, Walmart operated via franchises. In India, the stores are handled by Walmart under the name of “Best Price Modern Wholesale”. Walmart faced several challenges for its expansion in India. It acknowledged of spending around $25 million for politicization of Indian National Congress in the year 2012. This led to the suspension of several employees including the CFO and the legal team. Bharti Enterprises and Walmart separated in October 2013 to continue their businesses independently. After their alliance turned rocky, Walmart’s endeavor to capture Indian market was hampered for the time being.

Fig. 4
(Source: economictimes.indiatimes.com)

A look into the Walmart-Flipkart deal

Fig. 5 Bird’s-eye view of the deal

Walmart’s main business is a super market chain, but from past few years it has started to focus a lot more on e-commerce too. In 2016, it acquired Amazon’s competitor jet.com in a $3.3 billion deal. Moreover, it bought 12% stake of china’s e-commerce company JD.com. Recently, it has shifted its focus on one of the world’s fastest growing e-commerce country, India.

In May 2018, Walmart signed definitive agreements with Flipkart and became the largest shareholder of the company. For an initial stake of 77%, Walmart paid approximately $16 billion. This makes it the biggest ever acquisition by Walmart and world’s largest e-commerce deal. It includes $2 billion of fresh capital infusion and $14 billion for purchasing shares from existing shareholders.  Walmart also has an option to invest additional $3 billion and increase its stake to 85% within a year.  Out of the $16 billion of the payment made by Walmart, $5 billion came through cash reserves and $11 billion came through debt. Walmart offered fixed and floating rate bonds in as many as nine parts to raise the debt of $11 billion for the deal. The longest portion of the offering was a 30-year security. J.P Morgan Securities acted as the lead financial advisor, along with Barclays, while Hogan Lovells, Shardul Amarchand Mangaldas & Co. and Gibson, Dunn & Crutcher LLP served as its legal advisors. Goldman Sachs acted as exclusive financial advisor to Flipkart. Allen & Gledhill LLP, Gunderson Dettmer LLP, Khaitan & Co. and Dentons Rodyk & Davidson LLP provided legal counsel to Flipkart.

The business after the acquisition is held by some of the Flipkart’s existing shareholders, including Flipkart’s co-founder Binny Bansal, Tencent Holdings Limited, Tiger Global Management LLC and Microsoft Corp. The Tencent and Tiger Global has decided to remain on the Flipkart board and to be accompanied with the new members from Walmart. Additional potential investors are being discussed by Walmart and Flipkart who may join the round. Google’s parent company-Alphabet may buy around 15% stake in Flipkart for US$3 Billion according to Reuters report.

This deal will provide Flipkart with various resources, such as Walmart’s omni-channel retail expertise, grocery and general merchandise supply-chain knowledge and financial strength. Flipkart is not the only one who is going to benefit from this deal, Walmart will also benefit from Flipkart’s talent, technology, customer insights, agile and innovative culture.

Who left and who stayed?

Walmart-Flipkart deal not only made Sachin Bansal and Binny Bansal billionaires but also provided blockbuster exits to other investors. Following are the major investors who decided to sell their stakes and exit:

SoftBank:

SoftBank Group Crop., a Japanese multinational tech-to-finance conglomerate, which held about 19% stake in Flipkart. SoftBank had invested about $2.5 billion via its $100 billion technology-focused Vision Fund. It is expected to sell its entire share for approximately $4 billion and realize a return of 60% over its investment.

Sachin Bansal:

The co-founder of the company, Sachin Bansal held 5.5% stake in the company and received $1.06 billion after selling his share.

Naspers:

Naspers Limited, a South-Africa based global internet and entertainment group, held 11.18% stake in Flipkart. It will sell its stake for $2.2 billion, representing an IRR of approximately 32%.

Tiger Global

Tiger Global Management, a New York based investment firm has always been one of the biggest backers of Flipkart. The firm held 22.07% in Flipkart, after the acquisition it will continue holding 5% stake in the organization. Tiger Global is expected to get approximately $3.3 billion for selling part of its shares and exiting partially.

Accel

Being one of the first investors in Flipkart, the venture capital firm, Accel Partners held 5.9% stake in the organization. It would be taking around $1.2 billion by selling its stake and exiting completely.

Impact

Sachin Bansal & Binny Bansal’s exit

Walmart’s entry put an end to a decade long partnership of Sachin Bansal and Binny Bansal. Post-acquisition, Sachin had asked for stronger shareholder rights and a better role in the operations of the resultant entity. These demands were opposed by Lee Fixel of Tiger Global Management which is one of the major patrons of Flipkart, and the company’s board. Subsequently, Sachin had to sell his complete 5.5 percent stake in Flipkart, sign a non-compete clause with the company and move out.

In less than six months’ after Flipkart’s majority ownership was acquired by Walmart, Binny Bansal resigned from his position as CEO of Flipkart. He is alleged for severe personal misconduct based on an independent investigation done on behalf of Walmart & Flipkart. Walmart has adopted zero-tolerance corporate policy in the case. With the exit of both the Flipkart co-founders, India’s largest e-commerce company is solely in control of Walmart now. But the recently altered “Articles of Association” of the company came to Binny’s rescue to secure his position in the board. The new constitution i.e. the “Memorandum and Articles of Association” was adopted at the Singapore-incorporated Flipkart Private Limited with effect from 25th September 2018, which is a month before Binny Bansal resigned. According to the filings, Binny Bansal can remain a director at Flipkart as long he satisfies the ‘minimum ownership threshold’. The new Constitution specifies that till he owns at least 3,532,977 ordinary shares in the company, Binny Bansal will have the right to remain as a director. He currently holds 5.5% stake in Flipkart. If Binny is unable to maintain his share at or above the threshold as defined by the regulation, Walmart gets to appoint another independent director on the board.

Financial Impact

Skepticism has emerged from Wall Street about this deal. This has resulted in several equity analysts cutting their price target for Walmart’s stock or placing it under review. According to S&P Global, there a 33% chance that Walmart’s AA rating may downgrade in the next two years. This is due to Walmart’s aggressive “global deal-making” as it tries to compete with Amazon.

Fig. 6 Stock prices of Walmart during the announcement of the acquisition (2018)
(Source: yahoofinance.com)

Walmart’s leverage will rise to about 2 times EBITDA – earnings before interest, tax, depreciation and amortization, and debt will jump by more than $10 billion, compared to S&P’s expectation for a $5 billion reduction. Walmart also plans to continue its current share buyback program, indicating a “potentially less conservative financial policy” going forward.

Jabong-Myntra merger

Soon after Binny Bansal’s resignation came as CEO of flipkart group, Walmart announced the merger of the online fashion retailer, Jabong with its sister company, Myntra on 16th November 2018. Since the time Myntra had acquired Jabong in 2016 in a $70 million deal, the restructuring and streamlining of the procedures were in process. Jabong and Myntra will now fully integrate all the business functions. Ananth Narayanan, Myntra’s Chief Executive will continue to lead the Myntra-Jabong team. A mega lay-off is expected as a result of this restructuring resulting in letting go of around 200-250 employees in the coming months.

New CHRO Appointed

Walmart has brought in newer senior talents in pursuit to strengthen the leadership positions in Flipkart in the e-commerce space. Flipkart which is going through several organizational changes, recently hired Smriti Singh as its Chief Human Resources Officer (CHRO) as announced on 18 November 2018. This position was vacant for about 18 months. Singh has served as the executive vice president and HR head for Sony Pictures Networks India and is expected to join Flipkart in December.

What the future holds?

According to India Brand Equity Foundation, overall e-commerce revenue in India is projected to reach $64 billion by 2020 from $38.5 billion in 2017, an increase of roughly 66 percent. E-commerce sales in India will surpass the U.S. by 2034 and become the second largest e-commerce market in the world. Hence, this deal is much-needed boost from the foreign capital in the Indian market.

FDI regulations restricting Walmart from selling across border brands will encourage selling of the items procured locally. Currently, Walmart operates 21 Best Price cash-and-carry stores and one fulfilment center in India with more than 95 percent of sourcing coming from within the country itself. Moreover, it aims to support ‘Make in India,’ via direct procurement and improved opportunities for exports by global sourcing and e-commerce. Walmart also intends to partner with Kirana stores to help them adopt digital payment technologies.

With hysterically changing dynamics within Flipkart post acquisition and poor track record of Walmart’s operation outside North America, the magnitude of impact that this deal will have on the involved organizations and the Indian e-commerce economy is still dubious. But Walmart’s intended initiatives are the value proposition for the Indian market.

References

  1. Venture Intelligence – M&A (2018). Retrieved from: https://www.ventureintelligence.com/ma/madealdetails.php?value=434603684
  2. Venture Intelligence – PE/VC (2018). Retrieved from: https://www.ventureintelligence.com/dealsnew/dealdetails.php?value=1544540698/0/flipkart
  3. Value of mergers and acquisitions (M&A) worldwide from 2013 to 2018 (in billion U.S. dollars). Retrieved from: https://www.statista.com/statistics/267369/volume-of-mergers-and-acquisitions-worldwide/
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  16. 83% of Indian workforce prefers to be entrepreneurs: Survey (Aug 9, 2017). Retrieved from: https://timesofindia.indiatimes.com/business/india-business/83-of-indian-workforce-prefers-to-be-entrepreneurs-survey/articleshow/59987493.cms

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