The main difference between a merger and an acquisition is a merger is a situation in which two firms agree to unite as one single company rather than remain two separately operating firms owned by one company. The firms are usually the same size, and both companies’ stocks are surrendered creating new company stock issued in its’ place. An acquisition is when one company completely buys out the selling companies stock and makes itself the new owner of the company. Legally the selling company still exists as an independent legal entity, but overall control is in the hands of the parent company.
In July 2009 CEO of Zappos, Tony Hsieht made the announcement of Amazon’s acquiring of Zappos. In a lengthy e-mail Tony eloquently explains the future of Zappos and what will take place in the near future at Zappos. Throughout Amazon’s reign as online shopping powerhouse, they have been consistent in one of the most important aspects--growing and developing as a long-term contender in the online shopping world. Amazon has adapted and involved in the always changing markets by expanding market share through acquisitions.
In 1998 Amazon expanded itself into new markets with three key acquisitions. Two of the acquired companies, Bookpages and Telebook, were bought to expand Amazon’s market share into Europe; and the third acquisition, The Internet Movie Database (IMD), was bought to expand Amazon into a new developing market of online video sales. Amazon has always stressed customer service and customer ease as a main objective throughout their development. Zappos is a company known to be a customer service company since its inception.
In fact, Tony Hsieh stated in a Harvard business review article that he does not think of Zappos as a shoe company, but rather a customer service company. On the surface this acquisition seemed like a good fit for both parties, but the reality of high failure rates of acquisitions signifies there are many things to think about when considering acquiring a company. Our team will give a brief analysis on pre-acquisition activity within both companies, analysis of the acquisition itself, and give an overview of the success or failure of the acquisition.
The key aspects to consider in this acquisition are as follows: the simplest and most underestimated factor is what are the specific goals of each company in regards to a possible acquisition, can the two separate companies effectively leverage each other’s strengths to create a greater company value, and do these two companies align with one another in order to carry out their objectives and grow long-term. A History Of Zappos Zappos is an online selling shoe company founded in 1999 by Nick Swinmurn, Alfred Lin, and Tony Hsieh.
The company’s key concept is that they are in the customer service business, not a shoe company. Customer service is Zappos’ main asset. They do everything a little bit differently than any other company. Tony Hsieh encourages company culture which is the core of the company allowing them to be so successful. Before the acquisition, Zappos CEO Tony Hsieh had to make sure that the company will remain unchanged. Many people thought it would be end of Zappos and their culture after Amazon bought them. Amazon took over Zappos, but allowed them to run separately, keeping their company name and culture.
Zappos’s goal for the future is to deliver happiness to their customers and acquisition by Amazon allowing them to leverage each other’s strengths. Now with the merger Zappos has much better cash flow than before. Now they can refund people’s credit cards much faster than they could before and improve their customer service even more. With the acquisition they also gained lot of experience from senior staff of Amazon and vice versa. Prior to the acquisition, Zappos had to discuss their independence with Amazon.
Zappos tried to stay unchanged by the acquisition as much as possible while keeping all the benefits from the acquisition as long as they could. Zappos had big plans before the acquisition, and now with Amazon they are still focusing on their goals, but with resources from Amazon they can achieve them much faster. Zappos’ net sales in the first quarter of 2010 were almost 50% higher than the same quarter of the previous year. To ensure Zappos can grow at this fast pace they had to hire the right people. Zappos’s way to make sure that their employees really want to work at the firm is quite nontraditional.
After few weeks of training they offer their trainees money to leave. This price constantly raises and after the acquisition it was at $3000 not to take the job. Zappos didn’t change immediately after the acquisition, but now few years later we see some changes happening, but Zappos still keeps their culture untouched. The biggest change that happened in Zappos was handing over their Kentucky warehouse to Amazon. Tony Hsieh explained it as necessary move due to legal obligations. Zappos employees in Kentucky had to be transformed under Amazon with all their benefits changing.
Usually during acquisition many people will get laid off due to efficiency for both firms. Zappos has actually grown since the acquisition and no one lost their job as a result of it. It was a risky move for Tony Hsieh, because in one interview he admitted that Amazon can technically sell Zappos at any time. Some of their agreement works on mutual trust and so far it works for both Amazon and Zappos. A History of Amazon Amazon. com Inc. sells just about everything, and lots of it. What drives Amazon is the desire to enhance the consumer experience, whether it's shipping or product availability or price.
Over the past decade, Amazon has moved from strictly retail to both selling goods and then executing the orders, for itself and for third parties. Amazon, as much as people like to think of it as an e-commerce provider, is becoming a direct-to-consumer fulfillment company. How did Amazon become so successful so quickly? Strategy! Investing in the right plans at the right time and staying the course. Amazon embraced what is known as a “design school model” of strategy development. Despite the title, the model is simple to understand and can be highly effective.
It is the one used most by professors and consulting organizations. Organizations often struggle in finding a compelling competitive position. Successful organization can begin to drift away and total fail at what it takes to be successful. This tool can begin to help an organization get into the game. The design school model calls for both external and internal appraisals. An external appraisal helps an organization to understand threats and opportunities that are out there in the market. The internal assessment helps the organization to understand its strengths and weaknesses. The “Strengths, Weaknesses, Opportunities and
Threats” (SWOT) tool is one that most people are familiar with and stems from the design school model. Amazon conducted the external analysis using the following analysis frameworks: PESTEL Analysis, Industry and Competitor Analysis, Competitor Analysis, Global Internet Trends and GE Matrix. The “PESTEL” framework helped Amazon to identify trends that could impact them in six key areas: (P) Political factors: areas to focus on include political direction, taxes, trade restrictions. (E) Economic factors: includes GDP, inflation, interest rates, exchange rates and other macro and micro economic factors. S) Social factors: includes social trends, population growth rate, age distribution, career expectations, etc. (T) Technology factors: includes equipment, information technology, R;D. (E) Environmental factors: Includes weather and climate. (L) Legal factors: include health, safety, employment, discrimination, consumer and antitrust laws. Political, economic, social, technological progress indicates an increasing and attractive market? to be exploited by Amazon. com. The external appraisal includes Amazon looking at its competitive position to determine opportunities and risks and where it should focus.
To do this, they used Porter’s 5-force tool that helped them to understand the strengths and weakness of its competitive position, and where they might consider moving forward. The competitive rivalry amongst the e-retailing industry is intense. From some of the largest to the smallest companies, dotcom businesses are abundant, making? competition intense. Amazon. com competes directly with big firms such as Barnes and? Noble and Ebay. In simplest terms, the model looks assumes there are five important forces that determine competitive power. Amazon has hundreds of competitors.
The challenge is what ones to focus on. They focused on large-scale Internet retailers that offer a broad range of products. This exercise helped Amazon to better understand who their competition is. Ebay and Wal-Mart are examples. Global Internet Trends The Internet is Amazon’s key channel. The 20 top countries in Internet usage, and grow patterns were identified. A GE Matrix has been used to identify the attractiveness and competitive position of the? markets that Amazon. com operates in. GE Matrix: This is a matrix used to screen portfolios of business units.
Both the attractiveness of the industry and the strength of each business unit within the industry are plotted. Industry attractiveness is determined by the following factors: Growth rate, Size, Demand, Competition, Profitability and Global opportunities. Business unit strength is determined by: Market share, Market share growth, Brand, Distribution channels, Production capacity and Profit margin comparisons. Knowing, constructing, and fully leveraging strengths in the best manner possible is an important key to creating long-term competitive advantage.
Amazon is a great, leading-edge company that has successfully developed and implemented compelling strategies that we can learn from. Most large organizations conduct strategic planning, but in many cases real “strategy” and “planning” are missing. Instead too many strategic planning exercises are nothing more than budget positioning exercises. Not so with Amazon. Amazon has developed common sense as an organization. Becoming clear as to what will provide you a competitive advantage is paramount. We chase after the hot new industries where the risk is highest. The key is to sustained focus on smart strategies.
There are three simple tools that Amazon focuses on as part of its internal appraisal process. They include: Value Chain, Resources Based View and Financial Analysis. Amazon developed a value chain of itself to internal it can operationally best add value and maintain a competitive advantage. The value chain analysis undertaken examines the operational effectiveness of activities that? enable Amazon. com to perform better than its competitors; i. e. the distinctive value chain activities that are difficult to imitate. This analysis focuses on ‘value creation’ and ‘transaction cost economies’; where Amazon. om? configures its value chain activities to create unique value for customers, reduce its costs of? carrying out these activities and reduce the cost of its customers’ transactions. Some of Amazon’s competitive advantages from a value chain perspective include: Strong technological infrastructure with a single platform, High investments in technology development (e. g. , Kindle) to best leverage digital products, Great product forecasting system, Print on demand, Constantly soliciting suggestions on new products, Easy and fast payment system, 24 hour operations and Free returns within 30 days.
The resource based view helps an organization to determine where to invest in critical resources to have a competitive advantage. The more valuable and rare the right resources are in the right places, the more likely the firm may have a long-term advantage over its competition. A firm utilizes its resources and capabilities to create a competitive advantage. The organization’s resources and capabilities combined together constitute its distinctive competencies. Amazon successfully identified the right resources and developed its capabilities in key target areas.
These investments resulted in: Sophisticated online retailing technologies, Personalization features for customers on its websites, Reliable and easily scalable IT systems all one platform, New products (100 different products in seven major geographic markets), Top customer relationship system, State of the art warehousing, New products (100 different products in seven major geographic markets). Gearing, Debt and Capital Structure Amazon’s investments are paying off. Their net sales continue to grow, their cost of goods decreases as a % of sales and their net income continues to increase.
And, they continue to invest in initiatives that provide them a longer-term competitive advantage. Goals: The acquisition of Zappos by Amazon is equally beneficial in the long run for the two companies. Zappos’ goals after the acquisition are mainly focused on its own growth internally and externally. As their own independent firm they want to pursue their vision of delivering happiness to customers, employees, and vendors; and now they will be able to get their much faster.
Amazon has the capacity to help them grow at a pace they would not be able to by themselves. Zappos is going to remain its own independent entity and it will be run by the same owners the way they see fit. This is beneficial because one of Zappos’ best qualities is its unique culture and brand. Financially, Zappos wanted a shareholder and partner that thinks long term and will also do what is best for their existing shareholders. Amazon’s goals for Zappos are very similar to what Zappos themselves want. They like Zappos because they have a lot of growth potential.
Zappos is very popular, however they are not as large nor do they have the capacity for shipping, storage, or personnel that Amazon does and they want to leverage their capabilities to help Zappos grow. Amazon wants to leverage the intangible assets that Zappos possesses; the people and the culture of the company. The Culture of Zappos is one of its best qualities that no other company can easily replicate; working together the companies can share and learn from one another to improve the workplace culture in both companies.
Customer service is what Zappos hangs its hat on and Amazon can learn from them about their policies and even help them to provide better service. Metrics: It will take some time for Amazon and Zappos to be able to measure the effectiveness of the acquisition mainly because both firms emphasize the long term. The main focus for both sides is to grow the Zappos brand and their effectiveness in their goal to help customers. Zappos should see increased sales, more efficient distribution, and faster response times when customers have issues. Methods: Aligning the two companies and leveraging each company’s strengths to better each other.
Amazon has resources, technology, and operational experience that Zappos does not. Zappos can leverage all of these to make their own operations faster and more efficient by bringing people in from Amazon and learning from them. Amazons improved technology will help Zappos fill orders faster and improve logistics. Zappos has a very large distribution center in Kentucky fairly close to the UPS shipping hub. Amazon now has a very important strategic advantage with access. They can now move product faster and easier making their own distribution faster and less expensive.
Post- Acquisition Turnout On Wednesday, July 22nd, 2009, Tony Hsieh, the CEO of Zappos. com, emailed all of his employees to share the great news of their acquisition with Amazon. His board approved and signed a definitive agreement, in which all of the existing shareholders and investors of Zappos will be exchanging their Zappos stock for Amazon stock. After the exchange took place, Amazon became the sole shareholder of Zappos stock. Post-acquisition, Zappos continued to run their operations the same, doing what they believe is best for their brand, their culture, and their business.
By leveraging each other’s strengths, Zappos reached their vision even faster—delivering happiness to customers, employees, and vendors. By merging with Amazon, Zappos was able to accelerate the growth of their brand and culture. Amazon supports Zappos in continuing to grow their vision as an independent entity, under the Zappos brand with their unique culture. Hsieh also aligned his company with a shareholder and partner that think long term, just like Zappos. Zappos continued to run as an independent entity. In legal terminology, they became a wholly-owned subsidiary of Amazon.
Therefore, all of their jobs were as secure as they were pre-acquisition. The Zappos brand continued to be separate from the Amazon brand. Although they now have access to many of Amazon’s resources, they continued to build their brand and their culture just as they always have. Zappos has continued to grow their headquarters out of Las Vegas, attracting the right talent for each of their departments. After acquiring Zappos, Amazon has seen more profitability, more market share, greater growth and revenue, and most importantly, a better brand image.
By encompassing the unique customer service aspect of Zappos, Amazon has become one of, if not the biggest, online company. Amazon has seen substantial growth in net revenue since acquiring Zappos in 2009. Online business is a growing industry—the percentage of households with at least one computer has gone up from 64% in 2004 to 87% present day. In 2009, Amazon’s revenue was $24. 5 billion. This past year, they finished with total revenue of $61. 09 billion. In 2009, Amazon’s cost of goods sold was $18. 97 billion. This past year, it has grown to $45. 97 billion, a growth of $27 billion in just three years.
In 2009, before the acquisition of Zappos, Amazon’s gross profit was $5. 5 billion. Three years later, it has escalated to a staggering $15. 1 billion. Although debt as a percent of total capital increased at Amazon. com Inc. over the last fiscal year to 34. 87%, it is still in-line with the Internet and Catalog Retail industry's norm. Additionally, even though there are not enough liquid assets to satisfy current obligations, operating profits are more than adequate to service the debt. Accounts Receivable is typical for the industry, with 17. 78 days worth of sales outstanding.
Last, inventory levels, relative to its Cost of Goods Sold, are typical for the industry and have shown a consistent decrease during the last 4 years. This implies that management is becoming more efficient. Amazon’s acquisition of Zappos was clearly a smart move on both ends. Zappos and its employees were compensated fairly, and Amazon has seen a steady increase on the balance sheet and income statement. There is no limit to Amazon’s potential, now that they have acquired the amazing and unique company that is Zappos. Closing Remarks It is clear from our analysis that Amazon’s acquisition of Zappos is a good fit for both parties.
Each company’s goals of the acquisition were made clear through pre-acquisition negotiations. Zappos wanted to expand their operations through the use of Amazon’s large market share and also be able to use Amazon’s large array of assets to create a better costumer experience. Amazon wanted to learn the intangible and effective costumer service methods that have proven to be Zappos competitive edge. So far, each company has been able to effectively leverage each other’s strengths to achieve their goals. Furthermore, these companies align with each other in moving forward to achieve long-term growth.