Ocado (LON: OCDO) (OTCPK: OCDGF) shares are up 12% in London on the back of rumours about a possible bid. The Times: “Ocado spent most of the session at the top of the FTSE 100 leaderboard as speculation of bid interest from more than one American suitor took hold. The talk was that technology heavyweights such as Amazon were pondering the merits of an £8-a-share move — with Goldman Sachs and JP Morgan, as it happens, said to be acting for bidders. Ocado, which JP Morgan values at £1.6 billion excluding the retail operation, lost its place at the top of the FTSE 100 late in the day, closing up 6p, or 1.4 per cent, at 430p. That would value Ocado at £3.5 billion, compared with £6.6 billion at the mooted £8 figure.”
We'll find out soon enough. Such press speculation does - usually - bring on a declaration from the company that either such talks are going on, if they are, or that they're not. So, as we say, we'll find out soon enough.
Ocado share price from London Stock Exchange
What interests us is whether there would be any economic logic to such a bid? The answer being, well, yes, subject to a few assumptions.
The first assumption is that Ocado's technology is actually worth something. All that automation of warehouses - was it, is it, actually worth doing or having done? We do pretty much think that routine retail is going to continue moving online. Sure, folk like going out shopping for a new pair of shoes but the weekly supermarket shops is more chore than joy. So, we can at least imagine that the tech to automate that experience is worth having.
But if that's true then why isn't the tech being picked up by retailers the world over? It is, after all, for sale - or at least rent - to anyone who wants to pay for it.
One answer here is that the sale of it is difficult. Therefore the reason Ocado's making continual losses is because it's continuing to invest in making it better but not being able to amortise that R&D cost over enough sales. The answer to this is to have that same technology applied across some vast amount of sales in one fell swoop. Like, say, Ocado is bought as in the rumour by Amazon and then that tech is applied across the Amazon network. That solves two problems at one time - makes Amazon more efficient and also makes the Ocado R&D burden worthwhile.
Now, whether such a bid for Ocado will actually happen is another thing. But there is possible economic logic behind the idea.
