A bunch of big companies are expected to repatriate a healthy amount of overseas cash in the near future thanks to tax reform. They are also expected to generate more cash thanks to that same tax reform. So, in sum, there is going to a lot of extra cash flow through corporate America in the near future.
But how will these big companies use this extra cash? Dividends? Buybacks? Investments? Acquisitions?
Of all the potential use cases, acquisitions is the most sexy. And that is where the most speculation is happening. It seems every analyst and investor is throwing out a potential M&A deal that could go through now that all this cash is coming back to America. Some of these M&A ideas are ridiculous. Others are more grounded.
In my opinion, one of the most reasonable ideas being tossed around is that surging digital retail giant Amazon.com, Inc. (NASDAQ:AMZN) buys struggling brick-and-mortar retail giant Target Corporation (NYSE:TGT). In fact, I think its extremely likely (greater than 80%) that Amazon buys Target within the next 3-5 years. Here’s why…
Why Amazon Will Buy Target Soon
The idea of AMZN buying Target was first put forth by Loup Ventures’ Gene Munster. Munster is a well-respected analyst with 20-plus years of experience in analyzing tech companies, so he is regarded as one of the wisest voices on the Street.
Reputation aside, Munster puts forth a compelling argument as to why Amazon would want to buy TGT. There are three big drivers of this argument:
- Amazon is rapidly growing its offline retail presence because offline retail will forever remain a big component of the total retail picture. Target gives Amazon a way to continue its rapid offline expansion at a reasonable price.
- They have the same core audience of affluent customers, and Amazon is clearly trying to dominate that high-end market. With Target and Whole Foods Market, Inc. (NASDAQ:WFM) in its portfolio, Amazon will have the biggest online retail company, biggest offline retail company and biggest grocery store in that high-end market.
- Brick-and-mortar advancements, such as cashier automation, will allow AMZN to turn Target and Whole Foods into futuristic shopping experiences and further grow the Amazon brand.
I agree with all those points, and I would like to add some commentary here.
I don’t think there will ever come a day when there isn’t offline retail. Digital retail sales continue to grow their share of the total retail sales pie by about one percentage point every year. This trend will persist into the foreseeable future as shoppers continue to take advantage of digital retail’s growing number of perks (such as same-day delivery and in-store pick-up).
But offline retail will always have a place. Just look at the recent holiday numbers. Retailers are reporting strong results across the board. While some of that is continued strength in the digital channel, most retailers reported that in-store traffic ticked up as well. Clearly, demand for offline retail is still alive and well.
Moreover, Amazon isn’t the only internet company building an offline retail presence. Alibaba Group Holding Ltd (NYSE:BABA) is doing the same thing. Same with JD.Com Inc(ADR) (NASDAQ:JD). Essentially, the world’s largest digital retailers are all starting to build out offline retail presences.
There is a reason for that.
With Amazon committed to this offline retail push, it makes sense for them to acquire an all-in-one retailer. Whole Foods captures the high-end grocery market, but that is a narrow part of the whole offline retail picture. What about clothes? Furniture? Amazon still doesn’t have an offline retail presence in those categories.
Acquiring TGT would give Amazon an offline retail presence in those markets. Target offers clothes, groceries, furniture and everything in between. Its an all-in-one, offline-centered retailer with a wealthy customer base, much like Amazon is an all-in-one, online-centered retailer with a wealthy customer base.
They are a perfect match.
Bottom Line on Target & Amazon
All things considered, Amazon is very likely to acquire Target over the next several years. Unlike other M&A ideas being thrown around, this one makes a ton of sense.
As of this writing, Luke Lango was long AMZN, TGT, BABA, and JD.
