It was meant to be a simple earnings call. Just update the investors. It was business as usual and then the bomb was dropped. Masayoshi Son – Founder and CEO of Softbank mistakenly revealed that Flipkart was acquired by Walmart. When informed that he wasn’t to announce it yet, he smiled and simply said “Maybe I should not have mentioned that. Well, I can’t take it out!” Amazon and everyone else in the Indian e-commerce jungle went on high alert.
Soon after, both companies confirmed the news.
Walmart would be acquiring Flipkart for $16 billion for a 77% stake. This isn’t merely Walmart’s biggest deal ever. It’s also the world’s largest deal to acquire an e-commerce company. Additionally, it’s the largest exit for investors in India, who are expected to make $14 billion selling their shares to Walmart.
Furthermore, Walmart is also expected to pump $2 billion into Flipkart in equity funding to help its growth. As part of the deal, Sachin Bansal – Flipkart co-founder who serves as the Group Chairman will sell his shares and exit the company. However, the Flipkart brand is to remain and will be unique to that of Walmart.
Commenting on this deal, Doug McMillon – President of Walmart said, “India is one of the most attractive retail markets in the world, given its size and growth rate, and our investment is an opportunity to partner with the company that is leading the transformation of e-commerce in the market.”
Meanwhile, Binny Bansal – Flipkart co-founder and Group CEO commented on the deal saying, “it is of immense importance for India and will help fuel our ambition to deepen our connection with buyers and sellers and to create the next wave of retail in India.”
The goliath they call Amazon
The announcement of this deal came one day after Amazon announced that it would be investing $386 million into its Indian subsidiary. According to Forrester, e-commerce sales in India were valued at $21 billion last year. This number is expected to grow even higher as the 1.3 billion people of India get better internet access.
Needless to say, the Indian market is among the most valuable in Asia. It’s a golden opportunity that nobody wants to miss. Jeff Bezos – the CEO of Amazon knows this and has committed to investing at least $5 billion into Amazon’s Indian operations. Much of these investments has been aimed at challenging existing e-commerce companies in India, including Flipkart.
With this deal, Amazon now faces a battle on two fronts. In the US, Walmart and Amazon are fierce competitors. Now the battle has also begun in India. Walmart’s acquisition at Flipkart isn’t merely to seek a safe entry to the Indian market.
It’s also a move aimed at ensuring Amazon doesn’t steal a golden opportunity after missing out on the Chinese e-commerce boom. Of course, it’s not like Amazon didn’t anticipate this, which is why it also offered to acquire Flipkart.
But Flipkart is sailing on rough seas
Once the acquisition of Flipkart was announced, Walmart’s shares lost approximately $8 billion in value. Furthermore, Walmart announced that as a result of the deal, investors will lose 25 – 30 cents per share from this year’s earnings. This impact is expected to double in the following year.
Walmart investors aren’t happy with the deal and it’s not hard to see why. Flipkart isn’t a profitable business. The company has sold $7.5 billion worth of goods and has an annual turnover of $2.3 billion. And despite having 54 million customers, it still recorded a loss of over $1.3 billion in its fiscal year that ended in March 2017.
Granted, this was primarily due to a fall in its valuation after an investment round led by Tencent. Such costs are known as, “fair value loss on derivative financial instruments”. Yet, even without this cost, Flipkart would’ve still recorded a loss. And losses have become a characteristic of Indian e-commerce due to aggressive marketing and heavily relying on discounts.
As such, it’s no surprise that during a call with analysts, Walmart was asked, “Wait, we seem to be talking about the level of losses reducing; is making profits even on the horizon?” Walmart’s standard response to this and other similar questions has been that it’s thought about this decision heavily. Ultimately, it decided that this was an opportunity too big to miss.
An Indian startup success story that’s not pleasing everyone
After starting off as an online bookstore inside an apartment, Flipkart has grown to become the largest e-commerce company in India. It’s where many Indians first ordered products online and were introduced to the concept of cash on delivery. A concept that has become a standard practice now amongst many tech companies.
For India, the acquisition of Flipkart shows that it can build a unicorn that can be acquired by one of the world’s largest companies. Needless to say, it’s a success story for the Indian startup ecosystem. However, not everyone is celebrating it just yet. The deal has to be confirmed by regulatory authorities and it’s already facing challengers.
The Confederation of All India Traders wants to prevent the deal citing concerns about potential malpractice and predatory pricing. As such, it wants the Indian government to intervene and stop the acquisition. Similarly, the All India Online Vendors Association (representing thousands of vendors on Flipkart) has raised concerns that Walmart will introduce its own products at hyper-competitive prices to India.
Ultimately, if this deal is to be finalized then Indian e-commerce will be dominated by foreign giants. Protectionists aren’t happy with the idea. Walmart’s investors are understandably nervous. But on the other hand, Flipkart’s investors are very happy. This exit raises the bar for the Indian startup ecosystem and that opens the door to new crazy ideas for its entrepreneurs.