Walmart is an aging, once-beautiful actress that has paid $16 billion for a very expensive face-lift, and like all face-lifts, it is only a matter of time before gravity works its magic again, famous valuation guru Aswath Damodaran said.
Flipkart-Walmart deal: Comparing Walmart to an ‘aging actress’ that has paid much more than required for a ‘face-lift’, valuation guru Aswath Damodaran said in a blog post that $16 billion investment in Flipkart is a costly gamble that may not offer the kind of expected returns to the global retailer in the long-run. “If you are a Walmart shareholder, this is a negative signal and it does not surprise me that Walmart shares have declined in the aftermath. Staying with the life cycle analogy, Walmart is an aging, once-beautiful actress that has paid $16 billion for a very expensive face-lift, and like all face-lifts, it is only a matter of time before gravity works its magic again,” he said.
He also said that the Flipkart acquisition will feed bad behaviour for start-ups all over India, tempting them to go for growth without paying adequate attention towards building viable businesses, he said. “For start-ups all over India, though, I am afraid that this deal, which rewards the founders of Flipkart and its VC (venture capital) investors for building a money-losing, cash-burning machine, will feed bad behaviour,” he said.
Both Flipkart and Walmart shared a common opponent, Amazon, and the parties reached a deal out of fear of Amazon, he added. “Put differently, Walmart’s justification for investing in Flipkart is not that they expect to generate a reasonable return on their $16 billion investment but that if they do not make this acquisition, Amazon will be unchecked and that their decline will be more precipitous,” he added.
He also said that the deal can best be described as a defensive merger that only indicates towards weakness not strength and also points to a business model under stress.
Earlier this month, Walmart acquired 77 percent stake in Flipkart for $16 billion with an aim to expand its presence in the country. The deal amount includes $2 billion of primary infusion.