Finance Wal-Mart Would Probably Not Bother Merging

Finance

Wal-Mart would probably not bother merging with another retailer unless it was overseas, but would instead look to acquire a strategic partner with some of its other success factors, like logistics or information systems. A good example of such a company is Magellan Technology, a company specializing if RFID technology, something that has been an important part of Wal-Mart's logistics strategy in recent years (Traub, 2012).

Wal-Mart has basically three options for such an acquisition -- equity, cash or a combination thereof. When purchasing a private company, Wal-Mart is more likely to use cash I would suspect, as that company's owners might not want to own stock in Wal-Mart. One of the big reasons is that Wal-Mart is so much larger than Magellan, and Magellan's former owners would probably not benefit much from ownership of Wal-Mart shares since their involvement with Magellan is not going to be a major factor on the value of Wal-Mart shares. If I was in charge of Wal-Mart and making such an acquisition, I would use cash.

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There are plenty of interesting acquisition prospects for Wal-Mart. The company might take an interest in a struggling retailer for the real estate properties. Maybe JC Penney or Sears would be a good takeover target just for the real estate and customer lists. This might mean a strategic shift to more mall-based Wal-Marts, however, and many of those stores may be under long-term lease, which would devalue such acquisitions. Wal-Mart could also seek out a struggling competitor like K-Mart, or a grocery player, or an online business, in order to enhance its business prospects in key markets. Usually, Wal-Mart prefers to enter a new business on its own. It started selling drugs, for example, as opposed to buying an established pharmacy.

So the best second and third options for Wal-Mart are foreign retailers that would allow for the company to enter new markets more successfully. Parknshop is a big retailer in Hong Kong that has been linked a potential takeover target for Wal-Mart to increase its presence in Asia (Berfield, 2013). Such an acquisition is good for the company because it gets established supplier relationships and knowledge of how to reach local consumers, something that has hampered the company's efforts in a number of major markets. A third potential option, because the company wants to grow in China, is Wu Mart. This is a low-grade Wal-Mart knockoff and there is little doubt that its presence hurts the Wal-Mart brand in the country. Given the weak state of Chinese IP laws, Wal-Mart is better off buying this company out and either converting its stores or closing them in order to eliminate any confusion in the market. While in principle Wal-Mart probably does not want to reward Wu-Mart's owners for their violations, a principle that makes a lot of sense, it might be more valuable from a business perspective to simply eliminate such competition, which would allow the company to grow more quickly and increase its market share more rapidly. Profit should definitely come before principle this situation, and the company would get some good real estate in places like central Beijing.