E-retail has grown more than 50% so far this year for the department store chain. Belk plans to spend $32 million on the project.
More retailers like Zappos could be acquisition targets, one expert says
Buyers are more active of late, and they’re especially interested in firms with strong brand recognition and well-heeled customers, says Scott Munro of Pagemill Partners.
Zappos.com Inc. is just the kind of company buyers are looking for, and similar e-retailers could also become acquisition targets, says investment banker Scott Munro. But one e-retailer thinks Zappos might have gotten more if it had waited until equity markets picked up. Amazon.com Inc., No. 1 in the Internet Retailer Top 500 Guide, announced last week it would buy Zappos for $847 million.
Munro, one of the founders of Pagemill Partners, an investment bank that specializes in mergers and acquisitions, says that, after a quiet first quarter, more buyers are looking for companies to acquire. And they’re particularly interested in companies, like Zappos.com, that have a strong brand, a relatively affluent customer base, and are relatively large. “Buyers are concluding it’s just as easy to do a bigger deal as a smaller deal,” he says.
Zappos.com, No. 27 in the Internet Retailer Top 500 Guide, fit the bill well, and similar companies will be attractive to buyers in the months ahead, Munro says. “You’re going to see more opportunities in the second half for similar transactions, primarily of companies that have a unique brand and are of larger size,” he says. “That bodes well for people looking for exits.”
Venture capitalist Amish Jani calls Zappos “a textbook entrepreneurial story” of a company that built a dominant brand on the web in a category-shoes-that many believed would not sell well online. “You will continue to find next-generation e-retailing companies thrive, but always with an innovative new spin,” says Jani, director of FirstMark Capital.
While Zappos-which had been preparing for an initial public offering of stock for some time-could have ultimately raised money through an IPO, that’s been difficult for all types of companies since the stock market plummeted, says Tom Cox, president and CEO of Golfballs.com Inc., No. 453 in the Internet Retailer Top 500 Guide. This deal, he says, is “like an IPO without the hassle.”
While the sale is part of a trend toward consolidation, common across maturing industries, Cox says the barrier to entry remains low for online retailers and that smaller online players can continue to compete against increasingly large rivals. “Customer-facing innovation ensures relevance and growth in the face of better-financed competitors,” he says. “No worries.”
While Cox says Zappos and its investors “have achieved a nice exit,” Stephen Antisdel, a director and investor in online apparel retailer Working Persons Enterprises Inc., No. 397 in the Internet Retailer Top 500 Guide, says online retailers might do better to wait a while before selling, in hopes an improving stock market makes an IPO more attractive.
He notes Amazon’s offer of $847 million is only 1.3 times Zappos’ 2008 net sales of about $635 million, whereas Amazon’s stock market value is roughly twice its annual sales. Antisdel says the venture capitalists backing Zappos may have been unwilling to put more money into the e-retailer “and saw the opportunity to take some chips off the table with the Amazon deal.” Sequoia Capital is among the venture capital firms with a stake in Zappos.
“But who knows when the IPO markets will open back up,” Antisdel says, “and meanwhile there’s good reason to bet on the combination: Zappos’ domain expertise specific to the footwear category, merged with Amazon’s technology and customer base, is a pretty compelling story, too.”
The story may be more compelling because of the strong overlap of consumers who shop at Zappos and Amazon. Hitwise says Zappos has the strongest demographic overlap with Amazon of the five top apparel and accessories online retailers. There are age differences, however, with Amazon stronger in the 18-34 age group and Zappos attracting a slightly older audience, “so there could be growth opportunities for both of the web sites,” writes Heather Dougherty, research director of the web traffic measurement company, in a blog post.