Wal-Mart Takes Aim at Amazon With Its $3 Billion Jet.com Acquisition

By Markets Fool.com


Image source: Jet.com.

Continue Reading Below

Though rumors surfaced last week, it's now official: Global retail juggernaut Wal-Mart (NYSE: WMT) is buying e-commerce start-up Jet.com.

The move stands as the latest, and perhaps most significantexample of Wal-Mart's continued shift into global e-commerce -- a move that further pits Wal-Mart in a head-to-head battle for global e-commerce supremacy with market leader Amazon.com (NASDAQ: AMZN).

With so many important storylines at work here, let's quickly review what this move means for investors.

Inside Wal-Mart's Jet.com buyout

In headline numbers, Wal-Mart will acquire Jet.com for $3 billion in cash and $300 million in Wal-Mart stock. The deal already gained approval from both companies' boards of directors and will reportedly close before year's end.

Continue Reading Below

The deal marks Wal-Mart's largest-ever acquisition, in a sign the company sees e-commerce as a central strategic priority amid slowing growth in its core retail business. The purchase price essentially doubles the $1.4 billion valuation Jet.com received during its latest round of fundraising in November.

As part of the agreement, Jet.com co-founder and CEO Marc Lore will assume responsibility for Wal-Mart's e-commerce division, while also running Jet.com as an independent operating subsidiary.

Image Source: Getty Images

Lore, who reportedly stands to make some $750 million as the largest shareholder in Jet.com, is something of a visionary in the e-commerce industry. Along with several co-founders, Lore established and scaled the holding company Quidsi, which served as the parent company for Diapers.com, Soap.com, and Wag.com. After a protracted and highly public price war with Amazon, the Seattle-based e-commerce giant purchased Quidsi in 2010 for $545 million, making Lore one of the few entrepreneurs to successfully challenge the famously competitive Amazon and not completely lose his shirt.

Investors weren't exactly sure what to make of the Jet.com deal, though it seems like a clear-cut win for Wal-Mart, price tag notwithstanding.

A win for Wal-Mart?

For its part, Wal-Mart gains two important assets as part of the purchase. The first is Jet.com's sophisticated pricing software. The second is Jet.com's executive team, which has what one publication described as "some of the best e-commerce operations minds in the business." Especially when layered atop Wal-Wart's supply-chain excellence and purchase-power scale, it doesn't take an overly active imagination to see how both Jet and Wal-Mart stand to benefit from each other's strengths.

Though Wal-Mart launched its eponymous Walmart.com over 15 years ago, e-commerce has always been something of a strategic backwater for the world's most dominant brick-and-mortar chain. For context, Wal-Mart's e-commerce sales last year-- though topping $13 billion --accounted for just 3% of the company's whopping $482 billion in revenue. What's more, Wal-Mart's e-commerce growth remains lower than the industry average and has decelerated in recent quarters. Clearly, the company needs some help if it ever hopes to credibly challenge Amazon's increasingly dominant grip on the e-commerce space.

Judging by the market's initial reaction, investors may not view Wal-Mart's Jet.com purchase favorably; the stock traded down by nearly 1% on an essentially flat day for the broader market. That falls well short of a sharp rebuke, but still suggests investors dislike the deal to some extent.

There's certainly a case to be made that Amazon's leadership position in e-commerce will prove difficult to disrupt. Amazon's e-commerce business counts $99 billion in sales to Wal-Mart's roughly $13 billion. Its Prime subscription shopping and entertainment service continues to incentivize users to shift spending to Amazon. Though Wal-Mart recently launched a competitor service to Prime, it isn't clear what kind of reaction it has drawn from consumers.

I've long viewed the global e-commerce space -- with so much room for growth -- as a generational growth story, the true extent of which investors often overlook.Because of Wal-Mart's multiple structural advantages, it certainly seems possible for the company to carve out its own meaningful market share in this space.

However, with Amazon seemingly as strong as ever, success will be harder to come by for Wal-Mart than, say, five years ago. Regardless, waiting to prioritize e-commerce would only make things harder for Wal-Mart, and adding Jet to its operational fold should certainly help in that effort.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.