Last week, Flipkart founder Binny Bansal suddenly resigned from Flipkart, after Walmart’s investigation into alleged “serious personal misconduct”.
The moment the news was broken, it was carried by every media publication and was trending on every social media platform. The news unravelled thick and fast, like a drama from a Bollywood potboiler, with allegations and accusations flying fast.
India has always been interested in drama, but this is a first for a startup entrepreneur.
That this dominated and hogged headlines for the entire week is a testament to how important internet companies have become in India. Most of the ecosystem thinks of Messrs Binny and Sachin Bansal as heroes, and the strange circumstances in which this happened has deepened the plot. The headline “Binny Bansal is leaving Flipkart, but no one knows why” is apt.
But what happened and why is this so puzzling?
While I don’t want to get into the sordid details of what happened, at the risk of becoming a gossip magazine, the official line is that Mr. Binny Bansal “did reveal other lapses in judgment, particularly a lack of transparency”. There are also reports that suggest Walmart knew of the probe while negotiating the Flipkart acquisition, but chose to have its own “lack of transparency” to see the deal through.
While Mr. Binny looks to be the “fallen one”, and likely left in an “emotional and angry” move it’s hard to place a finger on who did wrong or what is the wrongdoing. The more interesting angle, on late-stage startup dynamics, is that just 4 months ago Binny Bansal was all smiles when the deal happened. He expected to be as the Flipkart Group CEO for many more quarters, but didn’t stay even two (unlike this happy picture)
Mr. Binny had sided with Walmart on the deal, while Mr. Sachin wasn’t on board. Tiger Global’s Lee Fixel, along with the board (including Binny), decided Mr. Sachin’s time was up. It is a deep, and important, lesson for startup founders that business sometimes trumps everything. It may be argued that Binny was ruthless with a friend, co-founder and journeyman.
Walmart, in turn, showed that it is ruthless with Mr Binny’s exit. It now may be appear that Mr. Sachin’s exit was better.
With both Bansals out, Walmart does not have any of the founding team at Flipkart. Walmart categorically said that Flipkart would continue to run as an independentbusiness, but the signs are likely this is changing rapidly. Jabong’s layoff has only been a footnote this week, but cost-cutting is underway. The US giant has arrived. Walmart has been notorious as one of the “worst employers in the world“.
Is it going to turn out to be the same way for Flipkart?
While time will tell if this is a bad deal for Flipkart, but what exactly was/is Walmart looking for from Flipkart? Walmart created the Indian startup ecosystem’s biggest liquidity event by purchasing 77% of Flipkart for $16Bn. Investors and early employees got incredibly wealthy.
One must expect Walmart looks to get wealth from this purchase as well, so where is it going to come from?
Walmart is a brick and mortar retail giant, but with little presence in India. Its only minor presence is in 23 B2B wholesale stores. These stores were the stillborn child of a Bharti-Walmart relationship ending in 2013, and Walmart has struggled to do much. India’s $500Bn retail market has been attractive to the aging American company, but regulations have kept it out.
While the Flipkart deal provides it access to India, e-commerce is a minor 3.5% of overall retail, and Flipkart is less than 40% of e-commerce. In the US, which is 10x India’s market, Walmart has a 10% overall market share at $500Bn of revenue. Flipkart’s $4-5Bn of sales is a minor drop in the ocean for Walmart. Additionally, Flipkart can’t drive sales to Walmart or vice versa in India, so where is there any operational or customer synergy?
Is there any synergy at all, or was this Walmart’s desperate attempt at staying relevant in the Amazon era?
To be fair, and how Walmart has shown this week, Walmart can take out a lot of costs and have better processes. Flipkart could potentially provide technology and e-commerce know how to Walmart global. But all that changes when you see Walmart’s deal-making activity in just the last 3 years. Jet.com ($3Bn), Shoes.com ($70MM), Bonobos ($310MM), Cornershop ($210MM). What is the common thread for all these companies? Each one is all e-commerce. Who is the common enemy?
It seems highly likely that Walmart is trying to snap up any company who can give Amazon a run (although, ironically, Amazon gave Flipkart a run in India). The small “synergy” pales in comparison to the “beat Amazon at all costs” strategy that is being played globally by Walmart.
This aggression played to Flipkart’s favour, added to the fact that it remained the only player worth buying in India after Snapdeal folded.
On a deal level, Flipkart has an estimated 10% gross margin, compared to Walmart’s 25%. Assuming a slightly higher revenue than reported in Flipkart’sfilings, taking a 10% GM on a $3.5Bn revenue pegs margin at $350Mn. A valuation of 20Bn is ~60x gross margin (a snoopy proxy for P/E given FK is loss-making). Clearly, the valuation implies tremendous growth from Flipkart, the higher these multiples – the higher the expected growth.
Walmart’s valuation to gross margin is 2x, and if Flipkart was valued using this multiple it would be worth an implied $700Mn. Amazon, with a substantially higher 40% gross margin, is valued at ~10x its gross margin. Using this multiple, with Amazon a “comp”, Flipkart would be worth an implied $3.5Bn.
Flipkart is growing at ~35% year on year. For it to grow from $700MM to $20Bn, at this rate, it will take 11 years; for $3.5Bn to $20Bn it will take 6 years. Improvements in gross margin will accelerate this, but the key point is that it will take years before Flipkart justifies its valuation as of today.
We aren’t even talking about making a 10x return on investment, yet.
All this indicates that it could be Walmart’s expensive attempt at winning online after losing the US to Amazon, and China in general. I think this was an unusually expensive deal and Walmart is paying up. With the win at all costs, no holds barred strategy to beat Amazon as the likely rationale, Prof. Aswath Damodaran’s excellent exposition calls this “an expensive facelift for an ageing actress“.
Walmart-Flipkart may turn out to be a bad deal for both.