Dividend Discount Model: Gordon Growth Rate
In the previous article, we became aware that the value of a stock can be split into two parts. One part is the horizon period i.e. the period chosen by the analyst for which they believe they can accurately forecast the financials of the company and therefore its dividends. This part remains the same when […]
Difference between Corporate, Retail, Investment Banking, and Private Banking
The Difference between Retail, Corporate, and Investment Banking Most of us when dealing with banks usually walk into the branch and get our work done we usually do not bother whether it is retail banking branch or a corporate banking branch. The difference between retail and corporate banking is that retail banking serves individuals and […]
Strategic Finance and Capital Structure
The capital structure decision has been considered to be a purely financial decision for a very long time. However, in reality, this decision has long-term strategic implications. The failure to understand these implications has encouraged firms to continue studying the fields of finance and strategy in isolation. The end result is that the firm often […]
Dollar Yuan Peg
China has become the largest exporter of goods in the world. This has been a remarkable feat achieved by the Chinese given the fact that just a couple of decades back, their economy was in complete shambles. Part of this feat can be attributed to the world class infrastructure that China has built to enable […]
The Concept of Stock Keeping Units (SKU’s)
Companies like Wal-Mart are often credited with bringing in technology to the retail business. Prior to multinational companies introducing technology, retail was just a mundane business which was run without the use of any electronic or sophisticated retail systems. However, all that has changed now as retail is at the center of many technological innovations. […]
Flipkart is amongst the largest unicorns in the Indian startup ecosystem. Wal-Mart is a known international retailer with revenues upwards of $400 billion. Both of these companies are formidable in their own fields. However, they are set to merge. Wal-Mart has valued Flipkart at $18 billion and is all set to complete the acquisition. This is good news for shareholders of Flipkart. This is because this valuation is significantly above the down rounds that they have received in their past few funding rounds. There were speculations that Flipkart will not sell its fashion arm to Wal-Mart. However, these speculations have been silenced as Wal-Mart has announced that they will acquire Flipkart completely including the fashion wing.
This deal has come as a surprise for many people. However, many critics are of the opinion that the Wal-Mart-Flipkart deal is a match made in heaven. This is why Flipkart rejected the offer of many suitors including Amazon and finally chose Wal-Mart to partner with.
In this article, we will understand why this deal is beneficial to both the parties.
On the other hand, Wal-Mart is viewed as being defensive. This is because a large section of the population is getting hooked on to online shopping and Amazon is the leader in online shopping.
Wal-Mart wants to create a presence. They are already struggling to create this presence in the United States. This is the reason why they don’t want to start from scratch in a promising market like India.
On the other hand, Flipkart is an established brand in the Indian consumer’s mind. However, they do not have the financial strength to match the deep pockets of Amazon. This deal will, therefore, benefit both parties. Wal-Mart will receive access to the fastest growing market in the world. On the other hand, Flipkart will receive the funds that it needs to take on and defeat Amazon.
Wal-Mart has now understood that it is unlikely for them to get a majority stake in any brick and mortar retail store chain. Hence, they are going the online route. The partnership with Flipkart gives them access to the Indian market. They also become the majority player with a controlling stake in the organization. This is precisely what Wal-Mart wants which is why Flipkart is the perfect match for them.
Flipkart has seen its valuation go down in successive rounds of funding. This is because investors are reluctant to invest more money given Flipkart’s cash burn rate. The conclusion is that Flipkart would have faced a shortage of funds had it relied only on financial investors. By roping in a strategic investor, they are avoiding a future crisis.
Wal-Mart also has access to some revolutionary technology built by Jet.com. More importantly, Wal-Mart has many private label brands which they are able to manufacture at rock bottom rates given their extensive supply chain in China. It would be easy for them to market these products in India as well. Since these products will be priced lower than the competition, it will give Flipkart the edge. The gross merchandise sold by Flipkart is expected to rise manifold after Wal-Mart acquires the company.
There are two major issues with the acquisition:
Your email address will not be published. Required fields are marked *
