Amazon and Zappos gets in bed together

I have been a big fan of Zappos since meeting Tony their CEO at the Underground Seminar a while back. Here is a picture of us while playing some spy game at the seminar.

Zappos announced via Tony Hsieh’s CEO Letter, they are now a wholly owned subsidiary of Amazon with a share swap deal worth about $800 m in Amazon stock and about $40 million in cash and restricted stock, based on the July 21st closing price. The announcement has given a nice boost to the share price.

This morning, our board approved and we signed what’s known as a “definitive agreement”, in which all of the existing shareholders and investors of Zappos (there are over 100) will be exchanging their Zappos stock for Amazon stock. Once the exchange is done, Amazon will become the only shareholder of Zappos stock.

Amazon share price

This is an interesting transaction and the question everyone seems to asking is why Amazon took this step. In the video that Jeff Bezos shares his thoughts and reasoning behind this move.

httpv://www.youtube.com/watch?v=-hxX_Q5CnaA&feature=player_embedded

The main reason can be summarised as follows:

• Zappos has built a unique culture of “Customer Happiness” which has driven their strong revenue growth.
• Zappos has enormous growth potential.
• For Amazon, the Zappos acquisition will return a better ROI on capital than if they had spent the same amount of money on their existing operations. The sweetener is the intangible value of the increasingly strong Zappos brand which corporate financiers call in their valuations, the goodwill factor.
  Amazon/ Jeff may learn a thing or two from Zappos/ tony about the use of Social Media for customer service and communication with their customers.
  For Zappos on the other hand, they get access to Amazon’s technology and expertise.
  The other obvious benefits are the economies of scale should they reorganise distribution, warehousing and admin costs.

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