The Flipkart acquisition battle has become a 4D game of chess
A Flipkart acquisition by Walmart would be a potential spanner in the works of Amazon to create a ‘one planet, one e-commerce’ model
The inevitable has happened. And it has happened sooner than expected. Global e-commerce leader Amazon has reportedly bid for home-grown Flipkart. Amazon has thrown in its hat even as the buzz around Flipkart inching closer to a deal with Walmart gains currency.
A major move is expected soon. But what are their calculations? What is likely going on in the minds of Walmart and Amazon?
Could Walmart be trying to stay alive in a “one planet, one e-commerce” model of Amazon? The answer to this question may be the key to the unfolding Flipkart acquisition saga.
Let us try to get into the heads of the players in this game of chess. For that holds clues to the moves they may make. Let us start with Amazon.
Ask yourself a question. When companies usually trade at 15 to 18 P/E (price-earnings multiple), why is Amazon trading at more than 338.95 P/E?
Clearly Amazon’s investors expect it to deliver much bigger earnings, and for a very long time to come. That story is what we are calling “one planet, one e-commerce”. Amazon is becoming a global behemoth, obliterating all competition (with the exception of highly regulated China). This is heady stuff. Heady enough to justify 300+ P/E multiple. In how many industries can this happen?
So it seems like life is all set for Jeff Bezos as he builds this trillion-dollar empire known for selling everything to everyone. It makes a perfect story. Almost like a beautiful painting. Until someone throws a pebble to punch a hole in the painting. And that pebble thrower is Flipkart.
When Amazon enters a new market, competitors quit or they die. In fact, the “Death by Amazon” index, compiled by Bespoke Investment Group, lists out 54 retail stocks most hurt by the technology behemoth. When you know that you are going to lose regardless, why fight? Investors and entrepreneurs end up folding rather than doubling the bet.
Unless, someone can show that you can fight and win.
To be sure, that story in India was looking no different. All competition was expected to surrender. But Flipkart’s Bansals kept raising more and more money. When people said the amount they raised was ridiculous, they went ahead and raised an even more ridiculous number. They matched Amazon’s discount to discount. Product to product. They gave a new meaning to the phrase “neck and neck”. But still it was hard to see any other end game other than the inevitable white flag of surrender.
Until Walmart came into the picture.
So what would Walmart’s game be? Why would they enter this bloodbath race? Are they trying to make money like they did with their ill-fated Bharti venture? Unlikely.
At the risk of speculation, I would like to suggest that something bigger is going on. Walmart is fighting for its long-term existence. As Amazon kept growing, it put a question mark on the survival of every major retailer. And despite its size and scale, Walmart is no exception.
Despite the huge amount Walmart could and likely did spend, it was not able to make a dent into e-commerce. What are its options? It can hope that this is not a long-term threat and pretend that all is good. However this strategy did not go well for the last company that tried this (BlackBerry). Or it could do something about it. Do what?
What Walmart needs is a beachhead from which it can start fighting back. India is a big market (at least in numbers) and Flipkart has probably figured out the e-commerce game to survive the Amazon juggernaut. Can Walmart replicate its success globally? Hard to say. But when it is life and death, any move looks like a good move. This one is no different.
How will Amazon respond? What is at stake is not just leadership in its most important market outside the US where Amazon has already invested billions. It is the sheer power and beauty of “one planet, one e-commerce” dream. If that dream goes, then everybody will know that the Big Boy is not invincible. If that story is gone, so is the trillion-dollar dream. So is the 300 P/E story. There is a lot riding for Amazon. Which means it may think it can’t afford to lose. But when two giants fight an all out war, it can be bloody. Instead of millions, they can squander away billions.
However, this is business. Once the fight starts, at some point we will either have ceasefire or one player will fold. Will it end up a Boeing vs Airbus like duopoly? Or another giant merger creating world’s largest online-offline retailer? But if the risk to Amazon is so high, why would it not bid aggressively for Flipkart and snuff out the Walmart threat at inception? After all Facebook did precisely that by buying out Instagram and WhatsApp. But that also carries risk. If Walmart fights and loses, then that will be a lesson for the rest of the world and nobody will stand up to Amazon. In fact, it will remove the incentive for anyone to even try.
While we wait for the endgame, it would be a happy ending for the Bansals of Flipkart. Many wrote Flipkart’s post-dated obituaries, and possibly they could have been right. But luck and good execution has gotten them to a point where they might come out whole.
For Lee Fixel and other investors who bet their house on Indian e-commerce, it will be a huge relief. But wait a second. Should they sell to Amazon or Walmart? For the early investors and Bansals, it is somewhat simple. They will make money either ways. But for the late-stage investors who came in at high valuations, they need a bump up. If they were to sell to Amazon they would still make some money but not nearly huge. But with Walmart, the game is still open.
As for Indian consumers waiting for the next ‘Big Billion Day’, what are you waiting for? Merrily click away. You will probably determine how the world shops 20 years from now. Not too bad for a late e-commerce entrant, right?
Shrija Agrawal is Mint’s deals editor. Due Diligence will cover issues in India’s venture capital, private equity and deals space.
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