Zappos Deal: Amazon Gets a Steal

Picture 10So Amazon bought Zappos for $850 million or $920 million or whatever it turns out to be. This is a great move for Amazon, which is one of the few branded e-commerce shopping sites beyond retailers and OEMs. Most of online shopping and certainly shopping engines are a commoditized blur. But Zappos was different from conventional online retailers; it was a bona fide brand that was expanding into Amazon territory. Amazon launched shoe site Endless to imitate and compete with Zappos. But Zappos was moving beyond shoes to handbags, clothing and accessories. It could eventually have moved into housewares and beyond.

It could also have had a successful IPO. The company had impressive revenues and would have been able to go public. According to reports I’ve seen the company had revenues of $850 million in 2007 and had crossed the billion dollar threshold. Why did they sell then for 1X revenue (or perhaps less than 1X revenue)?

According to Zappos’ CEO Tony Hsieh:

We realized that Amazon’s resources, technology, and operational experience had the potential to greatly accelerate our growth so that we could grow the Zappos brand and culture even faster. On the flip side, through the process Amazon realized that it really was the case that our culture is the platform that enables us to deliver the Zappos experience to our customers. Jeff Bezos (CEO of Amazon) made it clear that he had a great deal of respect for our culture and that Amazon would look to protect it.

We asked our board members what they thought of the opportunity. Michael Moritz, who represents Sequoia Capital (one of our investors and board members), wrote the following: “You now have the opportunity to accelerate Zappos’ progress and to make the name and the brand and everything associated with it an enduring, permanent part of peoples’ lives… You are now free to let your imagination roam – and to contemplate initiatives and undertakings that today, in our more constrained setting, we could not take on.”

Apparently the “real story” is that Sequoia wanted an exit now and forced it on the company. According to peHUB:

One of the sources says Zappos was financially strong enough to wait for the IPO market to recover, if it chose to go that route. The source, a Zappos shareholder who has seen the company’s income statement reports, said that the company did over $1 billion in gross revenue in 2008, $625 million in net revenue and had an EBITA greater than $40 million.

Zappos had raised $49.1 million from venture investors since its inception, most of it from Sequoia, according Thomson Reuters (publisher of PEHub.com). The Zappos shareholder, who says he has seen the company’s capitalization tables, says Sequoia had a 3x or 3.5x liquidity preference associated with the shares it purchased.

“When Mike [Moritz, a GP with Sequoia] came in, he came in at a high valuation, but he countered that with a very high liquidation preference,” the shareholder says. “It puts management on one side of the table and investors on the other. Then there’s always pressure to sell the company.”

At least two sources who do not hold board seats, but are directly involved with Zappos, indicated that Moritz and Zappos CEO Tony Hsieh came into conflict about the company’s future. Moritz, the sources say, wanted Zappos to sell while Hsieh wanted to remain independent.

This outcome seems wrong for Zappos, though a smart move for Amazon — to take out a fast-growing potential long-term competitor. I’d say that Amazon got a great deal.

3 Responses to “Zappos Deal: Amazon Gets a Steal”

  1. Malcolm Lewis Says:

    I guess it all depends on the comps for online retailers. 1x revs seems low, but >20x earnings sounds high to me — but I have no knowledge of the comps.

  2. More on Amazon’s acquisition of Zappos « The Other FMA Blog Says:

    […] sources today have pointed out that this is by far not as great a development as would like us to believe. This however is obvious if you read between the lines. […]

  3. Bonobos Blog » Our take on the Amazon/Zappos deal Says:

    […] a quip. Some people think Zappos was forced into it by their investors; others think it was a brilliant move by Amazon but spells the death of what made Zappos awesome to begin […]

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