Wal-Mart to Acquire Amazon? (AMZN, WMT)

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Includes: AMZN, WMT
by: David Jackson

Paul Kedrosky predicts that Wal-Mart will acquire Amazon in 2006. His reasons:

  1. Wal-Mart lags badly in its own web presence (see the Alexa figure above).
  2. Amazon has built a more viable business than Wal-Mart thought it would.
  3. This past year was a tipping point for more ubiquitous and growing presence for online shopping in retail.
  4. Wal-Mart can currently afford it. With total cash of $4.5 billion against Amazon's cash of $1.4 billion, and comparative market caps of $199-billion and $20-billion, the time is right. Granted, it would almost certainly be dilutive, but the strategic value would trump its dilutiveness.

Should investors therefore bet on Amazon as an acquisition candidate? Probably not, for three reasons:

First, Wal-Mart's online presence is large and growing faster than Amazon's. The Alexa traffic data doesn't tell the right story. (Paul acknowleges this in an update to his article.) In fact, Wal-Mart's online traffic (measured in unique users) was almost half of Amazon's in November according to comScore (table here). And Wal-Mart's traffic grew by 35% year-over-year, versus Amazon's growth of only 16%.

Second, web retailers' biggest challenge is the rising cost of online advertising, and Wal-Mart is partially immune from that while Amazon isn't. Note FTD's pre-announcement a few days ago (press release; analysis), and the widespread impact of rising PPC ad prices in early 2005. Amazon is exposed to this problem; but Wal-Mart can drive significant traffic to its online store from its fliers and stores.

Third, even if Wal-Mart were to acquire Amazon, that doesn't mean that Amazon shareholders would necessarily make money from here. Acquisitions can be symptoms of success but they can also be symptoms of failure. Yahoo, Google and eBay are not acquisition candidates because they're too successful and thus expensive. Were Amazon to be acquired, it might well be after a material decline in its stock price.

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