Amazon Sinks Close to $900M Into Zappos Deal

Amazon is making its biggest acquisition yet, having inked an agreement to acquire online shoe retailer Zappos for close to US$900 million in stock and cash. Under the terms of the agreement, Amazon will acquire Zappos shares in exchange for approximately 10 million shares of Amazon common stock, valued at approximately $807 million. It will also provide Zappos employees with $40 million in cash and restricted stock units. The deal is expected to close this fall.

Zappos will remain an independently operated unit, still headquartered in Las Vegas.

Amazon did not respond to the E-Commerce Times’ request for comment in time for publication.

In any economic environment — but even more so in a recessionary one — a transaction upwards of $850 million represents a major move. Amazon appears to be approaching this one with a great deal of foresight, said N. Venkat Venkatraman, a business professor at Boston University.

Beyond Shoes

Clearly, this is much more than just adding a popular retailer to Amazon’s already-huge stable.

“I look at it less as a channel for selling shoes but more as adding e-commerce and customer service capability,” Venkatraman told the E-Commerce Times..

“To me, what is impressive is that Zappos has doubled its sales between 2006 and 2008 to nearly $1 billion in total gross sales online. That growth shows that the company has core capabilities in e-commerce and customer service that will be valuable to Amazon as it charters growth plans.”

The two companies’ needs and strengths are very complementary, Eric J. Karson, associate professor of marketing at Villanova School of Business, told the E-Commerce Times.

“While Zappos may have been content with the traffic they were able to generate, there is no doubt the Amazon deal will increase traffic substantially,” said Karson.

Greater Efficiencies

Amazon, for its part, will hopefully absorb the efficiencies and service that Zappos brings to its fulfillment operations, he said.

“Remember, some big names have — or used to — rely on Amazon for their order-taking, stocking and customer service,” he said, pointing to the Target and Toys ‘R’ Us relationships, which ended badly. “No doubt there are some efficiencies to be picked up here.”

Also, “high-touch” consumer items like shoes will require that the new organization keep Zappos’ approach to customer service, Karson pointed out. “800 numbers and ‘free shipping both ways’ — prominent on the Zappos’ current site — are not Amazon’s strengths.”

There are other benefits to the deal, noted David Bates, chairman of Gunster’s technology and emerging company practice.

For one, it eliminates a potential source of serious competition.

“Amazon not only acquires a category-killer e-commerce site in Zappos, but also avoids the current threat of Zappos as a competitor to Amazon’s own Endless Shoes and the potential future threat of Zappos expanding into selling other product [areas] and further competing with Amazon,” Bates told the E-Commerce Times.

Good for E-Commerce

Also, the successful financial exit this transaction is giving to Zappos’ financial backers — including Sequoia Capital — should help encourage venture capitalists and private equity firms to further invest in e-commerce.

“An emerging e-commerce company may very well be able to look at this acquisition as the reason they receive funding,” observed Bates.

Indeed, Amazon’s stock has been performing well — at least relative to other e-commerce companies such as eBay — something that it strategically leveraged in this deal, according to Boston University’s Venkatraman.

It’s a judicious use of an attractively priced stock as the currency to acquire critical capabilities, he said.

Using stock to pay for the acquisition also sat well with Zappos, whose management team apparently requested that, added Gunster’s Bates. It “demonstrates that Zappos’ management also believe this transaction adds tremendous value to Amazon.”