Walmart’s Acquisition of Target

 

Introduction

For this paper, I would act like the CEO of Walmart. I have been tasked to analyze the existing position of Walmart. I would also be doing analysis of acquiring another retail store within the guidelines I have been given. Walmart is one of world’s largest retailer and has millions of customer all over the world. Acquiring a new chain would mean a careful consideration as Walmart has to involve quickly in the operations after the acquisition process is complete so that they can make it run according to Walmart policies as soon as possible.

I have chosen to acquire Target Corporation which itself is a retailing company and has millions of customer. I would try to remain within the three choice that are provided to me during the acquisition process. These three choices are either of 35%, 51 % or 100% acquisition of the voting stock. First, I would like to provide detailed description of the two companies so that different dimensions of these organizations are clear.

Walmart Background

With a slogan “Save money, live better”, Walmart is not only the biggest retailer in the USA but also in the world (Roberts & Berg, 2012). The company was founded by Sam Walton in 1962. The first retail store was in Rogers, Arkansas. Since then, Walmart has not looked back and expanded exponentially. Walmart sells almost everything but it started primarily as a grocery store. Walmart is present in more than 25 countries with over 10000 stores. Many shares of the retailer are sold in the open market but the Walton family still holds 5a% of them. Dough McMillon is the current president and CEO of the company. Walmart is the largest private employer in the world (Roberts & Berg, 2012). Walmart currently offers many products like groceries, toiletries, medicine, beauty products, organic and inorganic agricultural food, electronics and much more. The net income of Walmart in 2016 was $13.564 billion. Its revenue for the same year was $485.87 billion (Wal-Mart Stores, 2016).

Target Background

Target in discount retailer. It is the second biggest in size next to Walmart. The special thing about Target is that it is around for more than a century in the USA since its founding in 1902 by George Dayton. Though it was not known as Target since it was founded. Its previous name was GoodFew Dry Foods. In year 2014, Target recorded losses in its business. These lossed summed up to around $1.6 billion. This is the point which I think would be really helpful for me, as the CEO of Walmart, to negotiate some kind of acquisition option with the owners and administration of Target. Target had to shut down its operations I Canada due to financial and operational reasons. Around 35 hundred thousand people work at Target which is a massive work force.

Walmart’s strategic direction

Here we have to analyze the differences and similarities between Walmart and Target and how can Walmart develop a strategic direction out of it. Firstly speaking, both Walmart and Target are in the same niche. They are retailers. For Walmart, it would not be an issues to take over the operations of the Target or be a part of it if the magnitude of the acquisition is not enough to take over it. As earlier discussed, Target has a workforce of over 35 hundred people. For Walmart, it’s an opportunity to get this workforce in its own circle and improve their skills with the help of Walmart’s own experiences.

The primary difference between Walmart and Target is that Walmart’s moto is to sell cheap items in large quantities. It could therefore, have a certain compromise on the highest quality. On the other hand, Target focuses on quality and their items may have high prices. Walmart can use this opportunity to introduce products a bit expensive at Target stores and try out quality instead of quantity. Target would result in an increase of fixed assets for Walmart.

Synergy for Walmart

Organizations can get a wave of new energy after they have acquired new firms. This energy is identified as synergy (Damodaran, 2005). As the CEO of Walmart, I would be careful of the desired synergy during the acquisition process as it has also been reported to be a cause of paying more than deserved for acquiring new firms (Eccles & Cfa, 1999). The acquisition suggestion under discussion can be a source of both revenue and cost synergies for Walmart if properly handled.

It would result in revenue synergy due to the following reasons.

  1. It would allow to benefit from Target’s distribution channels
  2. Target already has a customer base, Walmart would get an access to it.
  3. Acquiring Target would result in one less competitor.

Cost synergy is analyzed in the following.

  1. A stronger bargaining position in front of suppliers in terms of greater need for supplies.
  2. Many common expenses could be eliminated.
  3. The workforce may be decreased if there are multiple people with same skills.

Choice Analysis

Following are some of the choices available to Walmart.

Accounting analysis influencing acquisitions

Walmart can look to acquire 50% or more of Target shares and become a parent organization. If 50% of the voting rights are acquired then Walmart will legally become hold a control over Target’s operations according to IAS 27.13. Walmart would then be able to consolidate the financial statements of both companies into one economic entry in the light of IAS 27.4

Different Accounting Methods

Fair value method is best for a company that is only looking at acquiring a small percent of the voting rights of the company it is trying to acquire. Consolidation of financial statements would be possible if 50% voting rights are acquired. Equity method would best suit if the ownership of between 20 to 50 % is sought.

The best Choice

In the light of the above discussion, I would recommend an acquisition of 51%. This will give Walmart a full control over Target and it would be able to make operational decisions after the acquisition is made. I would not recommend a 10% acquisition as this will add upto the acquisition cost but would not result any more power than what is possible acquisition of 51% voting rights.

As already discussed, Target has already inquired losses of over $1.5 billion. Acquiring all of Target will come with all of the loss overhead which would haunt Walmart in the short and long terms.

Fair Value of Assets

Target is a firm that is in loss at the moment. After its acquisition by Walmart, it may still remain in losses for another two year. During this period, it would definitely have a negative impact on the consolidated balance sheet. This would not be a good time to present its shares to the market. After two years, Walmart can present its shares to the market and hopefully gain profits from its shares.


 

References

Damodaran, A. (2005). The value of synergy.

Eccles, R. G., & Cfa, K. L. (1999). Are you paying too much for that acquisition?(Digest Summary). Harvard Business Review77(4), 136-146.

Roberts, B., & Berg, N. (2012). Walmart: Key Insights and Practical Lessons from the World’s      Largest Retailer. Kogan Page Publishers.

Wal-Mart Stores, I. (2016). Walmart Income Statement for 2017, 2016 – Amigobulls.          Amigobulls.com. Retrieved 30 April 2017, from           https://amigobulls.com/stocks/WMT/income-statement/annual

Assume that you are the CEO of one of the selected companies. You are responsible for gaining control over the other company. You have three (3) choices, either of which you believe that the Board of Directors will support.

  • Choice 1: Your company acquires 35% of the voting stock of the target company.
  • Choice 2: Your company acquires 51% of the voting stock of the target company.
  • Choice 3: Your company acquires 100% of the voting stock of the target company.