Acquisition of Flipkart by Walmart
Discuss about the Cross-Border Acquisitions By Indian Multinationals.
The intense challenges compel companies to adopt strategies to counteract them. Acquisition and merger have emerged into formidable strategies which companies adopt to emerge as more formidable in the global market place. Multinational companies often acquire companies across industries to strengthen their positions. The paper would take into account the acquisition of Flipkart by Walmart in May 2018 which turned out to be the most expensive acquisition in the ecommerce industry (walmart.com 2018). The paper would show how the acquisition would enable both the companies to compete against their competitor, Amazon. The outcome of the acquisition would be analysed from three angles namely, global and multinational strategy, diversification strategies and analysis of multi-business Corporation and financial conditions and financial analysis. This would be followed by recommendations Walmart.
Walmart, the American retail giant acquired Flipkart, the leading Indian ecommerce company in May 2018. It acquired a 77 percent stake in Flipkart for $ 16 billion and the value of Flipkart stands at $22 billion after this investment by the American retail company. The acquisition is being touted as the biggest acquisition of an ecommerce company till date (stories.flipkart.com 2018). The acquisition was the outcome of competitive and sustenance struggle both the companies were carrying against their biggest competitor, Amazon (seattletimes.com 2018).
The above discussion clearly shows that Walmart acquired Flipkart in order to gain greater competitive advantage over Amazon. Amazon is the largest ecommerce company in the world and is based on the United States of America. The company being the world’s leading ecommerce company has established itself as the leading ecommerce player in both matured and emerging markets. The company has presence in retail store format as well. Thus, it posed challenge to both the retail chains and the ecommerce companies. Its presence in the US and the host countries posed challenge to both international companies and local companies functioning in the retail and ecommerce sector (aboutamazon.com 2018). This analysis shows that Amazon posed threat to Walmart in the global market including their home market, the US and Flipkart in India. (economictimes.indiatimes.com 2018). Amazon holds a stronger position in the American market and its subsidiary gives stiff competition to Flipkart in India. This analysis shows that Amazon posed several challenges or threats to Walmart and Flipkart. First, it challenged their market capitalisation and revenue generation. Secondly, it competed with both the companies for acapital generation in the stock market. These two threats culminated in the third threat, risks of financial earnings and goodwill risks. Thus, Walmart’s acquisition of Flipkart meant to boost competitiveness against Amazon (walmart.com 2018). This competitive and financial challenge which Amazon poses to Walmart and Flipkart would lead to three solutions based on strategic management namely, global and multinational strategy, diversification strategies and analysis of multi-business Corporation and financial conditions and financial analysis.
The challenge
The acquisition of 77 percent stake of Flipkart was a part of the global and multinational strategy of Walmart. Walmart is a multinational retail chain operating through hypermarkets, discount departmental stores and grocery stores based in the United States of America. The supermarket chain had to leave the profitable German market having a potential of generating more than $ 370 billion (huffingtonpost.com 2018). Moreover, Walmart badly failed in Mexico, Brazil and China which had caused immense financial losses (forbes.com 2018). One can analyse that leading companies like Amazon have already turned their focus towards the emerging markets like South America and Asia. Failure of Walmart in Mexico and Brazil on one hand and China on the other showed its failure to cement its position in South America and Asia respectively. Thus, acquisition of Flipkart is expected to provide the American retail chain the base to strengthen its position in Asia since India is one of the most profitable market in the region.
Flipkart is the leading Indian ecommerce company which acquired Myntra and Jabong.com. However, the company faced stiff competition from Amazon India which had its business strategies tailor-made to suit the Indian customer preferences. Amazon sought to acquire Flipkart to gain absolute dominance over the Indian ecommerce market. Thus, acquisition by Walmart, a retail chain enabled Flipkart to maintain its market position and from being engulfed by its strong competitor. Moreover, it would be able to use the brand value of Walmart to tap the hugely profitable American market, thus, giving Amazon a run for market even in its own home country. This analysis shows that acquisition of Flipkart by Walmart was an outcome of the global and multinational strategies of both the companies (Buckley, et al. 2016).
Kotabe and Kothari (2016) mentions that diversification strategies enable multinational companies enter new markets and emerge into multi-business corporations which have significant implications for them. Diversification take the form of entering new markets or marketing new products. The multinational companies enter new host countries with their products to cater to a new customer base. They can also opt for acquiring new firms to get access to their customer base. These two strategies enable the multinational corporations to diversify their losses and risks which they encounter while operating in the international market. The acquisition of Flipjkart by Walmart exemplifies this diversification of market and market risks. Walmart suffered losses in China, Germany, Brazil and Mexico which did cost it very much. Moreover, it was a retail company and was facing stiff competition from ecommerce giant Amazon which has already cemented its base in the retail segment as well. Acquiring Flipkart allowed Walmart to enter the ecommerce market. The company also got access to three product umbrellas of Flipkart to strengthen its own product offering. First, it could use Phonepe, the online payment system of Flipkart. Secondly, it could enter the fashion market through Myntra and Jabong, which are in turn owned by Flipkart (Kotabe and Kothari 2016). This diversification would help Walmart, the world’s largest retail chain to break away from the B2B tag which was adhered to it. Moreover, by it would be able to use the brand owned by Flipkart in the US market to gain more revenue (bloomberg.com 2018). Walmart by this acquisition cemented its position in the global market as a multi-business organisation. This analysis clearly shows that diversification strategy enables business organisations to diversify their business risks (Kim, Hoskisson and Lee 2015).
Solution
Flipkart in its turn, got to strengthen its diversification strategy by obtaining support of Walmart. First, it would get access to the matured market of the United States of America. Secondly, the financial support of Walmart would enable it to compete with Amazon on global basis (bloomberg.com 2018). This analysis once gain points out to the fact acquisitions paves way for diversification among business organisations.
Acquisitions and mergers have serious implications on the financial conditions on both the companies concerned, the holding company as well as the subsidiary company. As far as the acquisition of Flipkart by Walmart is concerned, the latter got access to Flipkart’s online payment system, PHonepe app and fashion brands Myntra and Jabong. This would enable it serve new customer bases and earn more revenue (Menz, Kunisch and Collis 2015). The company would be able to provide its shareholders with more returns on their investment, thus attracting more investments in in return. Financial analysis of the acquisition shows that Flipkart is expected to earn less revenue in the initial years before emerging as a very profitable company in its new market, the US. The investors expect to hold the shares of the company till its price rises high enough to bring in positive returns (bloomberg.com 2018).
As far as Flipkart is concerned, the company belonged to the ecommerce market while Walmart belong to the retail market. This clearly means that Flipkart would be able to get financial support from Walmart and retain its brand name at the same time, which was expressly announced during the acquisition press conference. The company in turn would be able to enter the market of the US and exploit it to generate more revenue. Thus, the acquisition would provide strong financial base to both Walmart and Flipkart (Buckley et al. 2016).
Conclusion and Recommendations:
One can conclude from the discussion that acquisition of established companies across industries and nations has emerged into a powerful strategy to gain competitive advantage. The following are the recommendations which one can propose for Walmart on the grounds of the above discussion:
Walmart should expand its product line through acquiring more companies across industries. One can point out that Amazon, its competitor has presence in more diverse industries like books, video streaming and cloud computing. Walmart, in comparison to it has very limited presence in the retail and ecommerce sector (through Flipkart). Hence, the ecommerce giant should expand into other sectors by acquiring more companies.
The company should acquire new companies in other countries similar to its acquisition of Flipkart in India. This would enable it to strengthen itself financially and gain more competitive advantage in the local markets. This local market dominance would contribute to its high global market position.
References:
Boyle, M. and Rai, S. 2018. Walmart Falls After $16 Billion Flipkart Deal. [online] Bloomberg.com. Available at: https://www.bloomberg.com/news/articles/2018-05-09/walmart-to-buy-77-percent-of-india-s-flipkart-for-16-billion [Accessed 14 May 2018].
Buckley, P.J., Munjal, S., Enderwick, P. and Forsans, N., 2016. Cross-border acquisitions by Indian multinationals: Asset exploitation or asset augmentation?.
Flipkart Stories. 2018. Walmart to invest in Flipkart Group. [online] Available at: https://stories.flipkart.com/walmart-flipkart-investment/ [Accessed 14 May 2018].
Forbes.com. 2018. Forbes Welcome. [online] Available at: https://www.forbes.com/sites/greatspeculations/2014/04/02/challenges-wal-mart-faces-in-mexico-and-china/#54ea568817d4 [Accessed 14 May 2018].
HuffPost. 2018. Why Did Walmart Leave Germany?. [online] Available at: https://www.huffingtonpost.com/david-macaray/why-did-walmart-leave-ger_b_940542.html [Accessed 14 May 2018]
Kim, H., Hoskisson, R.E. and Lee, S.H., 2015. Why strategic factor markets matter:“New” multinationals’ geographic diversification and firm profitability. Strategic management Journal, 36(4), pp.518-536.
Kotabe, M. and Kothari, T., 2016. Emerging market multinational companies’ evolutionary paths to building a competitive advantage from emerging markets to developed countries. Journal of World Business, 51(5), pp.729-743..
Kotabe, M. and Kothari, T., 2016. Emerging market multinational companies’ evolutionary paths to building a competitive advantage from emerging markets to developed countries. Journal of World Business, 51(5), pp.729-743.
Menz, M., Kunisch, S. and Collis, D.J., 2015. The corporate headquarters in the contemporary corporation: Advancing a multimarket firm perspective. The Academy of management Annals, 9(1), pp.633-714.
Rai, S. 2018. Flipkart CEO steered around Amazon to deliver Indian consumers to Walmart. [online] The Seattle Times. Available at: https://www.seattletimes.com/business/flipkart-ceo-steered-around-amazon-to-deliver-indian-consumers-to-walmart/ [Accessed 14 May 2018]..
The Economic Times. 2018. Walmart acquires Flipkart for $16 billion in world’s largest ecommerce deal. [online] Available at: https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/walmart-acquires-flipkart-for-16-bn-worlds-largest-ecommerce-deal/articleshow/64095145.cms [Accessed 14 May 2018].
U.S. About Amazon. 2018. About Amazon. [online] Available at: https://www.aboutamazon.com/?utm_source=gateway&utm_medium=footer [Accessed 14 May 2018].
Walmart.com. 2018. grocery management . [online] Available at: https://www.walmart.com/ [Accessed 14 May 2018].
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