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Why Wal-Mart couldn't let Jet.com's founder get away...again

Marc Lore, CEO of Jet.com and Doug McMillon, CEO of Wal-Mart
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Marc Lore, CEO of Jet.com and Doug McMillon, CEO of Wal-Mart

Wal-Mart lost out on Marc Lore when he was selling diapers. This time, the giant retailer was determined not to whiff.

On Monday, Wal-Mart announced the $3.3 billion acquisition of e-commerce upstart Jet.com, and named Lore, the company's co-founder and CEO, as head of online retail. It's a hefty price to pay — the most ever in e-commerce — for a 2-year-old company that's been burning millions of dollars a month and is nowhere near turning a profit.

But Wal-Mart wasn't going to miss this opportunity. Not after what happened six years ago, when Lore's start-up Quidsi, the parent of Diapers.com, was snapped up by Amazon.com for $545 million following a bidding war.

JPMorgan Chase, Wal-Mart's financial advisor then and now, was equally committed to aggressively closing the deal after missing out on Quidsi, according to sources familiar with the matter.

Unlike in 2010, when Wal-Mart was up against Amazon as well as Walgreens in the bidding, there was no competition for Jet, sources said. Lore had spoken with other potential strategic investors because he knew Jet would require deep-pocketed financiers for years to come, but Wal-Mart was alone in pursuing an acquisition, said the sources, who asked not to be identified because the talks were confidential.

Lore didn't respond to a request for comment, and a representative from JPMorgan declined to comment. Randy Hargrove, a spokesman for Bentonville, Arkansas-based Wal-Mart, said he doesn't have perspective on the Quidsi deal and that "Marc's reputation speaks for itself."

Hargrove reiterated comments that CEO Doug McMillon made on a conference call on Monday.

"Marc's e-commerce experience and success are obviously attractive," McMillon said from Walmart.com's headquarters in San Bruno, California. "What he has built at Jet and his mindset at Jet does have application at Walmart, and that's really what led us to make the decision to let Marc be responsible for both Walmart and Jet."

The acquisition includes a payout of $300 million in Wal-Mart shares. Lore's stake stands at around $750 million, according to Recode, but requires him to stick around and build up both Jet.com and Walmart.com. Neil Ashe, Wal-Mart's global e-commerce chief, is transitioning to other roles and then leaving the company.

Some are referring to the deal as a high-priced acquihire because Jet was just getting off the ground. Lore's plan had been to serve customers with tremendous choice and a pleasurable experience while building a stronger economic model than Amazon. Algorithms help determine prices, which vary depending on how many items are in a customer's basket, the use of a debit card or credit card and whether a buyer waives the merchandise return option.

Wal-Mart said Jet is on pace for $1 billion in gross merchandise volume and has 12 million products.

"Jet.com brings a strong online presence, fresh perspective, and expertise on competing in the e-comm space and an attractive brand with appeal among millennials," analyst Jessica Schoen Mace of Nomura Securities wrote in a report. She recommends buying the stock and has a price target of $81.

Wal-Mart shares fell 0.6 percent on Monday to $73.34. With a stock market capitalization of $228.6 billion, Wal-Mart's purchase of Jet is equal to 1.4 percent of its value.

More importantly, Wal-Mart is desperate to crack Amazon's online dominance. The company launched Walmart.com in 2000, six years after Jeff Bezos founded Amazon, but has never been able to close the gap.

Amazon vs. Wal-Mart

Bezos' shrewd business tactics were on full display in 2010, when the company was pursuing Quidsi.

Amazon, Wal-Mart and Walgreens all approached Quidsi at about the same time. When Walgreens heard where the bidding was starting, it quickly bailed, sources said, eventually purchasing Drugstore.com the following year for $429 million. (The company said last month that it's shutting down Drugstore.com.)

Meanwhile, Amazon took control of the process, as documented in Brad Stone's book "The Everything Store: Jeff Bezos and the Age of Amazon." Amazon was slashing the price on diapers on its own site, putting pressure on Quidsi's margins and making outside investors hesitant to put in more money. Furthermore, Amazon promised to keep dropping prices if Quidsi sold to Wal-Mart.

"The Quidsi executives stuck with Amazon, largely out of fear," Stone wrote.

Wal-Mart, for its part, was too focused on the pricing battle in a niche category and not looking at the long-term technology advantage that Lore and his team could bring to the company, said sources with knowledge of the deal. That was under Mike Duke, who was CEO from 2009 through early 2014. McMillon, who's been at Wal-Mart since 1984, succeeded Duke at the helm.

The Jet purchase will be reviewed by regulators and is expected to close this year.

McMillon and Lore are now teaming up to make sure that Amazon isn't the only game in town. Of course, this wasn't the plan. After being forced into a sale to Amazon and then working at the e-commerce giant for two years, Lore's ambition was not to land a top executive job at Wal-Mart.

Rather, he'd set out to raise billions of dollars on a path to picking up enough market share to give customers actual choice in how and where they shopped online. Earlier this year, Lore responded to a question on the website Quora asking what would keep Jet from becoming the next Quidsi.

"Amazon could afford to dramatically cut the price of diapers because it was such a small percentage of their business," Lore wrote. "As a mass marketplace, Jet is much more diversified than Diapers was, so we're better insulated against that kind of aggressive pricing."

That may still be true, but getting there will require the strength of Wal-Mart's balance sheet.

—CNBC's Courtney Reagan contributed to this report.