Amazon Acquisition of Zappos In 2009

BACKGROUND

Amazon.com is the largest online consumer-centric organization that provides its products to clients through its website. The company focuses on convenience, price and easier selection of products. Amazon Corporation was convinced that the deal would result in tremendous growth to Zappos brand. Additionally, Amazon would support Zappos vision as an independent corporation, and that the company was committed to keeping it’s brand’s culture intact. Zappos.com was a recognized leading seller of shoes, handbags, and apparel. The company distributes its products through own website and affiliate partnerships.Zappos believed that it acted in the best interest of its shareholders by selling the company based market value payable by Amazon.

TRANSACTIONS BASIS AND THE BUSINESS CASE

The merger and acquisition deal between Amazon and Zappos was initially announced in July 2009 before closing the deal on November of the same year.The value of the deal was estimated at $1.2 billion, including the transaction fees.The purchase price of the deal included 10 million of ordinary shares and a cash payment and restricted stock units amounting to $40 million. The deal did not include any other unusual transaction terms.

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VALUATION DETAILS

The company contracted Morgan Stanly to calculate and estimate the equity value ranges for Zappos. Various valuation methods includeutilized include the comparable company analysis, Discounted Cash Flows analysis and precedent transaction analysis.

The comparative analysis

The method was selected on the basis that corporations with same characteristics are likely to have similar values. The Zapposfinancial data was therefore compared to trading multiples of companies such as Blue Nile Inc and Digital River Inc, Open Table Inc and Netflix Inc.

Discounted cash flows analysis

Amazon used the discounted cash flows analysis to estimate the terminal value of the company before the acquisition. According to the model’s results, Amazon believed that the equity value obtained from the lower end of sensitivity analysis was closely equivalent to the value of the deal. The components of the discounted cash flows method include a perpetual growth rate of 3% to 4% and an estimated discount rate of 12.5% to 17.5%.The equity value of the model based on given assumptions was estimated at $1,555 to $2,785 million. Sensitivity analysis was also conducted on such results with the lower end producing and estimated equity value of $430,000,000. The value of the merger deal was therefore reasonable and within the range provided under the sensitivity analysis.

ACCRETION DILUTION

The basic components of the model include a net income of $4,889 and $1,768 million for the buyer and seller respectively. The per-share value of the buyer at the acquisition was 11.4 with outstanding shares estimated at 429 million. The overall accretion was estimated at 25%.

SUMMARY AND CONCLUSION

Since the merger and acquisition event that took place in the year 2009, Amazon Corporation has continued to enjoy growth on its share prices from $85.76 in July 2009 to $1942.91 in July 2019. The performance can be associated with major acquisition activities, including a merger with Zappos, which has been recognized as one of the best deals.In general, the report identifies that the merger was a good deal and that the companies have continued to enjoy an upward trend in stock values. The comparison between the pre-merger and post-merger reveals an increase in overall value and success. According to the research conducted by (Vedd, Rishma, and Liu), there was a positive upward trend on the three important financial indicators, which include stock price, net incomes and Earnings per Share between the pre-merger period of 2007-2008 and post-merger period of 2010 and 2011.

 

Works cited

Vedd, Rishma, and David Liu.”The Effect of Cultural Integration on Financial Performance Post-Merger.” Global Journal of Business Research 11.1 (2017): 71-84.