Alibaba and Amazon
Amazon is an e-commerce company founded by Jeff Bezos in 1994. The firm started as an online bookstore and later diversified into a business model with multiple moving parts. First, Amazon sells merchandise directly. The company provides buyers with a portion of its goods through its online storefront based on a small markup and keeps inventory in its large network of warehouses. Apart from direct sales, the business offers a platform for numerous retail firms to market their goods to the public. Items sold via Amazon’s retail partners are usually uncommon or expensive, enabling the company to avoid slow-moving inventory likely to dilute profits. Amazon retains a commission on all items sold through its website. Amazon also generates revenue from selling consumer electronics, apparel, beauty products, and several media devices, such as videotapes, music CDs, software, DVDs, and books. Amazon’s e-commerce platform has simplified the consumer-shopping experience, making it the largest online retailer worldwide per market capitalization and total net sales.
Today, consumers are hooked to the convenience of online shopping and home delivery offered by Amazon. The company has rapidly grown from a novel concept to an overwhelming e-retail force, and its growth trend is firmly fixed for the future. The company has successfully lured consumers away from traditional brick-and-motor stores, becoming a robust economic juggernaut. In an evolutionary sense, 43% of all retail sales in the United States are attributable to Amazon, and this share is projected to grow further (Wahba, 2017). An increasing number of consumers are hooked to Amazon’s mobile shopping trend due to the convenience offered.
Although e-retail is founded on many similar retail principles governing in-person trade, the two business areas differ greatly. Instead of a balanced retail marketplace, the dramatic increase of online transactions coupled with intense rivalry for unlimited global web markets has spawned an online retail ecosystem majorly dominated by Amazon. The company’s stocks continue experiencing robust growth every year. Strong annual sales push Amazon even further ahead of its online rivals, and the company’s business model helps lift its shares. Major retailers like Target, Sears, and Macy’s failed to fare well in navigating the evolving face of retail trade. For instance, Target’s shares dropped by 25%, while Sears and Penney’s stocks lost half their value (Wahba, 2017). Amazon is considered a front-runner in digital retail and remains deeply committed to continuing to innovate for the new digital ecosystem.
Amazon’s industry dominance and unique market position represent a lucrative opportunity for a merger. In the U.S., Amazon accounts for almost 38 cents out of every dollar consumers spend online (Wahba, 2017). Moreover, the retailer accounts for over 5 cents of every dollar consumers spend on retail purchases. As Graph 1 illustrates, it is projected that Amazon will be the source of 50% of all U.S. online sales by 2021.
Graph 1: Amazon’s industry dominance
Source: Wahba, 2017
The Management Team
Most of Amazon’s success is attributable to a management team that helps run company-wide operations smoothly. Chart 1 gives a summary of Amazon’s management team.
Chart 1: Amazon’s Management Team
Source: Kim, 2019.
Currently, Jeff Bezos serves as the company’s president and chief executive officer (CEO). He is tasked with delivering strong leadership by working with other executives, such as members of the board, to establish company goals, strategies, and plans (Kim, 2019). He is mandated with presiding over the entire workforce, as well as managing budgets and ensuring proper resource allocation. Brian Olsavsky is the senior vice president (SVP) and chief financial officer (CFO) (Kim, 2019). As the CFO, Brian manages all of Amazon’s financial actions, such as internal audits, investor relations, and financial analysis. His major duties include; tracking Amazon’s cash flow, analyzing its financial strengths and weakness, as well as proposing possible corrective actions. Jeffrey Blackburn serves as the senior vice president of business and corporate development (Kim, 2019). His main duty includes supporting the SVP to create strategic roadmaps for business growth. He is also responsible for defining and resolving major strategic issues with the board of directors.
David Limp is also a key figure of the management team. Limp currently serves as Amazon’s senior vice president (SVP) of devices and digital management (Kim, 2019). His duties include overseeing the development of all hardware business at the company. Andy Jassy serves as the CEO of Amazon’s web services unit, a subsidiary he pioneered in March 2006 (Kim, 2019). In this capacity, Jassy has delivered numerous cloud-computing platforms and applications currently used by government entities, enterprises, and individuals globally.
The Acquisition Purchase Price
In the event of a definitive merger agreement, Alibaba will have to acquire Amazon for $2,188 per share in an all-cash transaction valued at approximately $1 trillion (Swartz, 2020). This purchase price will include Amazon’s net debt. However, to make the deal more attractive to Amazon, Alibaba can decide to add a certain amount to the estimated market value, which is especially important given that other tech giants including Google and Microsoft are considering the same acquisition. Completion of this transaction will be subject to approval by shareholders, board of directors, and regulatory approvals representing Alibaba and Amazon.
What makes this Merger a Good Fit
The business strategy of growth through mergers and acquisitions (M&As) has gained massive popularity worldwide, particularly in recent years. Notably, Alibaba Inc., a Chinese multinational specializing in e-commerce, adopts the same trend by acquiring Amazon, a U.S.-based e-retailer. Business expansion is the main reason why Alibaba remains bullish on Amazon’s stock.
M&As can be categorized into two main types based on whether they are created between the companies operating in the same industry or otherwise. An Alibaba and Amazon merger qualifies as a horizontal merger. The two companies operate in the same industry and are engaged in almost similar business activities. Alibaba and Amazon will be considered as a combination of two competitors. While Alibaba dominates China’s online shopping space, Amazon does the same in the U.S. If the two firms merge, they will eliminate the competition between them, thus increasing their market share. Alibaba will be able to diversify its products, services, and long-term business opportunities. The newly-acquired firm will provide Alibaba with products and services that the company can sell through its own distribution platforms. Doing this will generate more revenues for Alibaba’s business. Increased economic productivity can help the company to further expand its geographic reach, as well as its market share. Besides, an increase in Alibaba’s territory and market share will make it harder for other players to compete. As such, they must either be content with a tiny market share, become another acquisition, or cease operations. Because the acquisition increased Alibaba’s scale, the merged entity will see significant supply chain savings. In turn, the company can order supplies at discounted rates and lower its prices to drive out competition. Alibaba and Amazon’s horizontal merger can increase their market share and disrupt the level of industry competition.
Big corporations can merge and operate as global entities. If Alibaba and Amazon merge, this will imply the merged monolith would have an almost total monopoly. Amazon enjoys an almost total monopoly in the Western world. But if Alibaba is excluded, Amazon would monopolize the entire world. In China, Alibaba dominates an estimated 86% of the industry’s market share, rendering it a monopoly (Gupta, 2019). A merger between the two firms means that they would become the first-ever trillion-dollar firm with an insane valuation.
For the two companies to complete the $1 trillion deal, they have two hurdles to overcome. These include staff retention and international relations (Malik & Choudhary, 2018). The biggest challenge derives from optimizing the new organizational structure to retain key players and ensure the best talents are confident about their job security (Malik & Choudhary, 2018). Employees from both Alibaba and Amazon might negatively react to the merger, as they may feel threatened by the changes to company strategies, leadership, and job roles. Malik and Choudhary (2018) recommend that during this transitional phase, both firms must maintain employee trust and engagement to avoid high turnover levels. An employee exodus would imply a sizeable drain on internal morale and knowledge for both Alibaba and Amazon. At the higher company levels, a significant loss of keyboard members or influential executives will severely hurt the success of this deal because company perception and culture will be damaged. This merger involves two firms operating worldwide. Therefore, both Alibaba and Amazon will be exposed to foreign markets, which they have little or no experience in. Malik and Choudhary (2018) emphasize that language barriers and cultural differences can profoundly affect Alibaba’s ability to operate across borders. Information regarding the deal must be translated into both languages for questions to be answered in real-time. In addition, Alibaba and Amazon employees must learn other languages to facilitate effective communication between workforces. However, cultural differences promote knowledge exchange between Alibaba and Amazon as the two firms have different strategies solidified by cultural heritage, and entering foreign markets would otherwise be time-consuming. Therefore, a certain amount of cultural difference would foster organizational learning and thus the value of the merger.
An Operation Strategy
When two different companies merge, they must absorb not only each other’s objectives, but also practices, policies, and most importantly, intangible abstract elements, such as company values and culture. Regarding business operations, Kling (2000) recommends designating a transition team comprising of representatives from Alibaba and Amazon. These members will oversee all the company’s activities to guarantee that the needs of each unit are resolved. The transition team executives must follow “the three options” for operation (Kling, 2000). These include; Alibaba’s traditional methods, Amazon’s traditional methods, and a mix of both. Framing the operations in this manner will enable the merged company to narrow down its choices faster and inform discussions on organizational structure. Each company must provide a detailed description of how their respective method would be employed in the specific business areas (Kling, 2000). This strategy will help the team determine which of each company’s traditional methods would align with the newly-merged entity.
Financing The Deal
The deal is expensive, and if Alibaba does not have huge amounts of cash in hand, they will have to pursue alternative funding options. If Alibaba and Amazon merge, their first option will be cash transactions (Golubov, Petmezas, & Travlos, 2016). This financing method is the cheapest compared to all the other methods. Another advantage is that it results in an instant transaction and has minimal errors. Once the transaction is completed, the involved parties do not have to tamper with it again. However, the biggest disadvantage is that the deal involves colossal amounts of cash, approximately $1trillion. Notably, this is a huge sum, and Alibaba may not have it on standby. The second alternative is debt financing (Golubov et al., 2016). However, debt funding is expensive. Taking a loan means that Alibaba will have to make payments over a prolonged period, including interest. This can significantly increase the purchase cost, which must be considered during the pricing process. The good news is that it is relatively easy for Alibaba to access debt while repayment plans are highly flexible.
Another option is equity funding. In acquisition finance, this method is by far the most expensive source of capital. Equity funding appeals to Alibaba because of flexibility; there are no commitments to repay the loan (Golubov et al., 2016). This is particularly important if the merged entity is not yet generating profits. In turn, this will give Alibaba the freedom to channel more resources into growing the business. The drawback of using this method is that profits must be shared among the investors from both firms. Alibaba must be willing to share part of the earnings with equity investors. The amount of money given to investors might be higher than the interest rate associated with debt funding.
Stock swap transaction presents another appealing funding option. If both firms own publicly-traded stock, Alibaba can exchange its stock with Amazon. This method will be suitable if Bezos wants to retain part of the merged entity’s stake since he will still be actively involved in the business operations. Alibaba will rely on Bezos’s proficiency to operate effectively. If the two companies choose stock swap, accurate stock valuation is paramount. They can apply various stock valuation methodologies, including Comparative Transaction Valuation Analysis, DCF Valuation Analysis, and Comparative Company Analysis. Unfortunately, global economic events could wreak havoc on Amazon’s share prices regardless of their profitable performance. Notably, the global financial crisis can knock down trillions of dollars off the global stock market value. Moreover, artificial market movements like shorting affect stocks. Although this method presents various pros and cons, the former outweighs the latter. Given that Amazon is a large publicly-traded company, the most common structure that this acquisition can take is through a stock swap.
If Alibaba does not have cash in hand, it can choose other methods to finance the deal. Each funding method comes with its share of commitments, pros, and cons. Thus, both companies must exercise Due Diligence during the transaction. Whichever funding method is applied, for Alibaba, the results would make all the efforts worthwhile by forming a stronger and diverse company.
Golubov, A., Petmezas, D., & Travlos, N. G. (January 01, 2016). Do Stock-Financed Acquisitions Destroy Value? New Methods and Evidence*. Review of Finance, 20, 1, 161-200. Accessed on 25th June 2020 from http://hdl.handle.net/10.1093/rof/rfv009
Gupta, R. (2019). Just How Far Ahead Is Alibaba in China’s e-Commerce Market? https://marketrealist.com/2019/07/just-how-far-ahead-is-alibaba-in-chinas-e-commerce-market/
In Malik, D., & In Choudhary, A. (2018). Emerging challenges in mergers and acquisitions. Newcastle upon Tyne, UK : Cambridge Scholars Publishing.
Kim, E. (2019). Amazon’s executive organizational chart, revealed. Accessed on 25th June 2020 from https://www.cnbc.com/2019/01/23/who-are-amazons-top-executives-2019.html
Kling, L. R. (2000). Negotiated acquisitions of companies, subsidiaries and divisions. Place of publication not identified: Law Journal Seminars Pr.
Swartz, J. (2020). Amazon is officially worth $1 trillion, joining other tech titans. Market Watch. Accessed on 25th June 2020 from https://www.marketwatch.com/story/amazon-is-officially-worth-1-trillion-joining-other-tech-titans-2020-02-04
Wahba, P. (2017). Amazon Will Make Up 50% of All U.S. E-Commerce by 2021. Fortune. Accessed on 25th June 2020 from https://fortune.com/2017/04/10/amazon-retail/