We all know M&A activity occurs in waves. 2016 just so happens to be waving goodbye to a particularly impressive 2015 regarding M&A volume. European M&A deals suffered a 41% drop in the second quarter of this year, while Brexit uncertainty has caused an 85% year-on-year decline for the second quarter in Britain. However, skim across the pond and one can see that American M&A activity remains relatively tenacious. Such health in the American M&A sector is primarily fuelled by the technology space. In particular, Wal-Mart’s role in the most expensive acquisition for an e-commerce start-up, when it acquired the online retailer Jet.com, has been one high point concerning increasing M&A activity. However, let’s take a look at the exact motivations behind, and forecasts one can take from this deal.
- Wal-Mart stock prices, July – September 2016
From the chart, it is possible to see a decline in Wal-Mart stock price after the acquisition of Jet.com in early August. This is understandable considering the surprisingly large premium paid to Jet.com and any slight uncertainties that have followed throughout the following weeks regarding integration of workplace cultures. Management power struggles have not appeared to be an issue as the innovative and tech-knowledgeable Marc Lore has continued to head Jet.com and Walmart.com. This is assumedly a relief for Wal-Mart management after their poor performance in the e-commerce sector over the past few years.
Although Wal-Mart’s global e-commerce sales increased by 12% in 2015 to $13.7 billion, this pales in comparison to its major competitor Amazon, which experienced an increase of 20% to $107 billion across the same period. These relatively underwhelming figures posted by Wal-Mart deteriorated yet further during the first quarter of 2016, slowing to just 7%. Furthermore, Wal-Mart’s e-commerce sales could do with a boost, standing annually at just $14 billion having experienced declining growth rates for the past five quarters. This is a mere fraction of Amazon’s equivalent figure, $99 billion.
Such issues in the e-commerce sector must surely have been a major driver for Wal-Mart in this acquisition of Jet.com, an entirely online organisation that has recently topped $1 billion in sales. This figure has arrived after the company has been running for just two years. Amazon’s sales did not reach this landmark figure for four years after the firm’s creation. Jet.com runs an intuitive real-time pricing algorithm, SmartCart, which provides the customers with extra discounts if they buy more products. It also offers further discounts if customers forfeit the right to return the item(s). Such innovation will undoubtedly aid Wal-Mart’s e-commerce sales, at very least by providing access to Jet.com’s extensive customer base that is primarily made up of millennials, an audience with which Wal-Mart has infamously struggled.
With Jet.com’s tech “know-how” and Wal-Mart’s economies of scale offering, the potential synergy between the two firms could become very successful indeed.
Wal-Mart has come under significant criticism for seeming to overpay for Jet.com. The deal was funded in a split fashion with $3 billion of cash and $300 million in stock, to be paid over the next five years. Admittedly, if we consider Jet.com’s price-to-sales valuation, it does seem to be incredibly high. It stands at around 6. However, perhaps Jet.com’s price tag can be justified if one considers the following factors:
- Jet.com has had an incredibly successful initial couple of years and has been forecasted to experience impressive future growth.
- $3.3 billion is not too much for Wal-Mart, which controls around $27 billion in annual operating cash flow.
- The development of Wal-Mart’s e-commerce capability, considering its recent failures in this area, are surely crucial.
Thus, one can see Walmart’s logic in paying such a premium for Jet.com. Some may view it as risky. Others will see the acquisition as a smart move with potentially huge future payouts, especially if the deal brings Wal-Mart into closer competition with Amazon’s online marketplace.
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