Amazon's Zappos Deal A Nice Buy, But Dilutive For Now


It looks like Amazon got a nice pickup by acquiring beloved online shoe retailer Zappos for 10 million shares (roughly $890 million) and $40 million in cash and restricted stock.

With Zappos’ 2008 revenues estimated above $1 billion, Amazon will end up paying less than 1X revenue for the company, which was reportedly forced into selling by one of its venture capital firms, Sequoia.

The catch: Because of Zappos’ easy-going return policy and liberal free shipping, “margins are wafer thin,” Bernstein’s Jeff Lindsay wrote in a note this morning. He estimates operating margins under 2% on a GAAP basis and that the company was “operating close to break-even on a stand-alone basis.”

So while an excellent deal, Zappos will likely be dilutive to Amazon. And because Zappos will continue to run on its own in Nevada, short-term cost synergies will likely be relatively small. (The good news is that Amazon’s ownership will give Zappos tremendous leverage, which could help improve profitability.)

Changes for Amazon: It will probably end up winding down its business, which overlaps with Zappos, and will probably have to start collecting sales tax in Nevada.

We expect to hear more about the deal during Amazon’s earnings call this afternoon.

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