Wal-Mart: It's not just governments pushing back on globalization. Investors are demanding tweaks, too. Take Wal-Mart. The retailing behemoth has made no secret of wanting its hypermarkets to cover the African savanna. Yet it settled for 51 per cent control of South Africa's Massmart for $2.3 billion after pressure from the target's shareholders. In a curious twist, international investors look to have feared losing a regional retail champion more than domestic owners or Pretoria did.
It's not hard to see why the prospect of Wal-Mart ownership might have made South African politicians uneasy. The company's notorious anti-union stance doesn't win many admirers in a government with strong labor ties. Critics of globalization often accuse the firm of gutting local manufacturers and retailers by selling imports dirt cheap.
Moreover, the rainbow nation's leaders had a precedent of sorts if they rejected the bid: Canada's decision to nix the foreign takeover of national fertilizer champion Potash Corp. Yet the government seemed happy enough with Wal-Mart's promise to abide by Massmart's existing labour contract and the argument that filling its gigantic maw is a big opportunity for local manufacturers.
But international investors who own about 70 per cent of Massmart had cold feet. They wanted to keep a big chunk of the African upside directly, instead of holding a pale version of it via Wal-Mart. Massmart would represent less than two per cent of the combined firm's sales and profit.
While there is more risk in investing in Africa, the potential returns are higher. Massmart has generated a 26 percent return on invested capital since 2000 according to Citigroup, better than the already decent 19 percent Walmart cranked out in the last quarter. There’s plenty of potential, too, as Massmart expands outside South Africa.
Wal-Mart is at least is familiar with this sort of arrangement. It recently bought a majority stake in a chain in Chile.
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And it owns two-thirds of its Mexico operations, which have been extremely successful. While incomplete integration can lead to managerial infighting, it also means local executives have more power.
This may be desirable in developing markets where decision-making must sometimes be done on an ad hoc basis.
Wal-Mart may someday subsume all of Massmart and succeed in peppering Africa with malls from Cape Town to Alexandria.
But until then, investors want a direct share of the action.
