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Amazon (AMZN)
Amazon Acquires Shoe-Retailer Zappos
Amazon.com has made headlines numerous times in its 14 year history, for acquisitions, strong earnings, and other momentous news reports. Yesterday's announcement, however, may be considered the biggest one of them all. Amazon announced that they will be acquiring the hugely-popular online shoe retailer Zappos.com, in a deal that will be Amazon's largest acquisition ever. Why has Amazon - a site that focuses primarily on books, movies, and other media – decided to spend so much to acquire a shoe store, and how might this acquisition change the brand and attitude of Zappos?
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The deal to acquire Zappos is a mostly-stock deal, where Amazon will give Zappos 10 million shares of Amazon stock, as well as an additional amount of stock and cash for the employees. The total deal is valued somewhere around $900 million, based on the current price of Amazon's stock. The management team for Zappos isn't expected to change, and Amazon is hoping to retain most of Zappos employees, in order to maintain the feel of the company. It has been reported that Zappos CEO Tony Hseih was hesitant to strike a deal, but that the company's venture capitalists strongly recommended going through with it.
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But why has Amazon decided to expand into the shoe industry? Actually, this is not new territory for Amazon. Amazon has been expanding its site over the years, and already sells shoes, clothing, and accessories on its website. Furthermore, online shoe sales is a fast growing market, with online sales jumping from $3.3 billion in 2007 to $4.3 billion in 2008. Amazon has clearly noticed this trend, because in 2007 they actually tried to launch their own online shoe retail website, Endless.com, but it tends to receive only one-sixth of the traffic that Zappos.com receives. Their inability to compete with Zappos has likely been a major factor in its decision to purchase the company.
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What does this mean for Zappos? A huge reason why the company is so successful is that over their ten year history, they have become widely known for their great customer service. The company offers free shipping, free returns, and uses any possible avenue to interact with its customers; for example, Zappos' CEO has a Twitter account which has over 1 million followers. The company has developed a very loyal consumer base. Fortunately for everyone involved, it looks like all the parties want everything to stay the same; Amazon is not forcing the company to move locations, and is really trying to maintain the atmosphere of Zappos that has strongly contributed to making the company so successful. CEO Hseih announced to employees that "we plan to continue to run Zappos the way we have always run Zappos — continuing to do what we believe is best for our brand, our culture and our business."
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At this point, both parties seem quite satisfied with the deal. Zappos successfully convinced Amazon to offer stock options, instead of cash, and is undoubtedly thrilled to be staying in the same location with the same employees. Furthermore, Zappos now has access to Amazon's resources (including finances), which is helpful as the company has recently been forced to struggle with some layoffs. Amazon is acquiring a company with a wonderful reputation, and the ability to draw in huge sales figures; Zappos had gross sales around $1 billion last year. So if all goes according to plan, Zappos customers will still deal with the same company they know and love, and Zappos employees will keep on working with the same friendly attitude; the only difference will be that Amazon will now reap the benefits. Hopefully, the two companies will manage to work well together, and the best practices of each company will rub off on the other, forming a powerful alliance.
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