Wal-Mart which is one of the largest retailers in the world operates in 15 countries over 8,500 stores. The growth rate of Wal-Mart has come to a saturation point in many segments due the slow economic condition in the world. However, Wal-Mart has potential for an inorganic growth which has influenced the Wal-Mart management to look for some feasible options. Whole Foods Market, a leading company in natural food products retailing, is doing well in the southern region of USA. This paper upon analyzing Whole Foods Market from a financial perspective will evaluate many aspects of possible merger or acquisition with Wal-Mart and then present a final recommendation related to the possible merger or acquisition at the end.
Whole Foods: Company Background
In 1978, John Mckey and Rene Lawson borrowed $45,000 from family and friends and started a food chain business called Saferway in Austin, Texas. In 2003, Whole Foods Market was certified by the US government as the first ‘organic grocer’ of USA (Whole Foods Market #1). Whole Foods Market has its revenue growing at a rate of 10% with the net profit back to 6.5% which is above the industry average. Whole Foods Market probably has all these good numbers due to its operation in organic and fresh foods market (Whole Foods Market #2, 2012).
Why Whole Foods Market
As per the report submitted by AC Nielson, the average grocery market is expected to grow at 3.8% in next 5 years and the organic foods market a rate of 10% for the coming years due to more and more people turning health conscious and realizing the value of organic and fresh foods. Wal-Mart can not grow at such high rate with its current set of grocery business. Though Wal-Mart is one of the leading players in the organic business, its image as a seller of organic goods is not neat and the Wal-Mart organic business is not growing as fast. On the other hand, Whole Foods Market has the cleanest image in terms of pure organic grocery store. Merging with Whole foods Market will provide Wal-Mart with a clean organic food seller image giving an access to a larger organic food supply chain.
Whole Foods Merger/ Acquisition Strategy
A discounted cash flow analysis shows that the cash flows for Whole Foods in the coming years will be the same as cited below, assuming WACC to be 7% and expecting the past growth trend of the company to be similar in future with the same percentage of net profit (Valuation 101, 2012).The terminal growth of cash from 2017 onwards is 3% (Dixon, 2005).
Sprouts Farmers Market and Safeway are other two options Wal-Mart can think of buying or merging. At present Sprouts Farmers Market is a very small chain in the organic industry and will not provide Wal-Mart a strong entry into the organic market which merging with Whole Foods Market will provide. Safeway being a larger company than Whole Foods, Wal-Mart needs to invest a huge sum for the acquisition of the company which is a risk by itself. Furthermore, Safeway has a slew of non-organic grocery businesses which Wal-Mart does not require as such businesses will not add any value after merger.
Mergers and Acquisition: Success factors
In case of mergers and acquisitions, it is not easy to define success factors. However, there are broadly four factors for a company to take into consideration. Firstly, it should see if the merged entity will have business synergy. If a merged entity creates more business conflicts than synergy then the merger is not recommended. Secondly, a company should do a background calculation to find out a reasonable price for purchase. It should not offer a price higher than the reasonable price. Thirdly, the acquiring company should be disciplined in making valuation of the target company in case of the purchase being a cash-only purchase (Knilans, 2009). Finally, a company should only look at entities smaller or reasonable in size operating in similar business segments because companies from completely different business segment often fail after merger.
Wal-Mart can go ahead with its proposition of a merger for Whole Foods Market because it will help Wal-Mart get an access to a large organic market. Wal-Mart will also see a fast growth rate with the organic market growing at a fast pace. I have learned about the concept of merger and acquisition and the differences between the two in this module. I have also learned about the steps required for a merger and the success factors involved in mergers and acquisitions.
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