Amazon.com buying shoe seller Zappos for $928 million

SAN FRANCISCO Wed Jul 22, 2009 11:34pm EDT

1 of 2. Zappos.com is seen in a screengrab taken July 22, 2009.

Credit: Reuters/Zappos.com

SAN FRANCISCO (Reuters) - Amazon.com will pay about $928 million for booming online shoe retailer Zappos.com, expanding aggressively into the apparel arena with a well-known name after trying unsuccessfully to go it alone.

Amazon said on Wednesday it struck a deal to buy Zappos, for 927.9 million -- mostly in stock -- growing its footprint in shoes and apparel.

The world's largest online retailer should benefit from the fiercely loyal customer base at Zappos, which had about $1 billion of gross merchandise sales last year.

Zappos is known for its attentive customer service, free shipping and a free returns policy which inspires shoppers to gamble on shoes. The company said Amazon will allow it to continue running its business as it always has.

Analysts applauded the deal. Bernstein Research analyst Jeffrey Lindsay called it an "outstanding acquisition."

But the move also signaled Amazon had fallen short with its online shoe site Endless.com, launched in 2007.

"This is, in some ways, Amazon throwing in the towel on footwear because they've tried to compete with Zappos," said Forrester Research analyst Sucharita Mulpuru.

"If you can't beat them, buy them."

Amazon, which began as an online bookseller, has greatly expanded its range of offerings while also allowing third-party sellers to showcase their own items on its site.

That has allowed the company to post robust online sales in recent years, outpacing brick-and-mortar retailers, even as former online stalwarts such as eBay Inc, have stumbled.

"A big part of the reason why Amazon is interested in us is because they recognize the value of our culture, our people, and our brand," Zappos Chief Executive Tony Hsieh said in a letter on its blog.

"Their desire is for us to continue to grow and develop our culture (and perhaps even a little bit of our culture may rub off on them)."

The Zappos website says the company, founded in 1999, has more than 1,300 employees and stocks more than 3 million shoes, handbags, clothing items and accessories from more than 1,136 brands.

IRREVERENT SHOE SELLER

In 2008, Zappos earned more than $40 million before interest, tax, and amortization on net revenue of $625 million, a Zappos shareholder who had seen the company's financials told Thomson Reuters private-equity news site PEHub.

The source, who spoke on condition of anonymity, said the company had considered going public through an IPO, but that main investor Sequoia Capital had pushed for a sale instead. Sequoia did not return calls for comment.

An irreverent company, Zappos' website calls its executives monkeys and Hsieh joked in his letter that the deal's headline should read "Zappos and Amazon sitting in a tree ...," a reference to a nursery rhyme.

Zappos has put customers at ease buying shoes online because it guarantees free shipping on deliveries as well as returns.

Pacific Crest analyst Steve Weinstein said the deal allows Amazon to dominate a big new category.

"It (Endless.com) certainly hasn't been as successful as Zappos," he said. In shoes I think Zappos is clearly the brand in the mind of consumers."

The acquisition is slated to close this autumn, and Amazon said the Zappos management team will remain intact. Zappos said it will be run as an independent entity and its brand will be separate from the Amazon brand.

"We think that there is a huge opportunity for us to really accelerate the growth of the Zappos brand and culture, and we believe that Amazon is the best partner to help us get there faster," Hsieh said in his letter to employees.

Amazon said it will acquire all of the outstanding shares of Zappos and assume its outstanding options and warrants in exchange for approximately 10 million shares of Amazon common stock. It will provide Zappos employees with $40 million of cash and restricted stock units.

Based on Amazon's closing price of $88.79, the deal is valued at about $927.9 million.

Morgan Stanley, and Fenwick & West advised Zappos on the deal. Lazard Ltd advised Amazon.

(Additional reporting by Alexander Haislip; Editing by Edwin Chan and Anshuman Daga)

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