M&A Case Study: Amazon and Zappos Street Of Walls Investment Banking e!"ni!al raining
In this Case Study module we will discuss three key aspects of understanding of a real-life Mergers & Acquisitions (M&A) deal ! ! !
Company "#er#iews ews Merge rger $e $eal "# "#er#i r#iew %aluat luatiion Metho ethods ds sed sed
'e will take a deep look into the large M&A deal that took place in the eCommerce sector In o#em*er +,,. Ama/on. Inc completed a pre#iously announced acquisition of 0apposcom Inc nder the terms of the deal. Ama/on paid 0apposcom1s shareholders appro2imately 3, million shares of Ama/on stock (#alued at 45,6 million at the time the deal was announced) and 47, million in cash 8he M&A deal were ad#ised *y in#estmen in#estmentt *anking *anking teams teams at Morgan Stanley Stanley (0appos) and 9a/ard (Ama/on) Company "#er#iews Ama/oncom is a customer-centric company for three kinds of customers consumers. sellers and enterprises 8he Company ser#es consumers through its retail we*sites. and focus on selection. price. and con#enience It also pro#ides easy-to-use functionality. fulfillment and customer ser#ice Ama/on is the largest retailer in the nation. with re#enues e2ceeding 47: *illion annually 0apposcom was the ;3 online seller of shoes at the time of the deal. stressing customer ser#ice It stocks < million pairs of shoes. hand*ags. apparel and accessories. speciali/ing in some 3.,,, *rands that that are diffi difficul cultt to find find in mainst mainstream ream shoppi shopping ng malls malls 8hroug 8hrough h its we*sit we*site e (and 6.,,, 6.,,, affili affiliate ate partners). 0apposcom distri*utes stylish and moderately priced footwear to frustrated and shop-worn custom customers ers nation nationwid wide e In +,,5. +,,5. one year year prior prior to the deal. deal. 0appos 0appos report reported ed annual annual re#enu re#enues es e2ceeding 4=<, million Merger $eal "#er#iew 8he following graphic illustrates the timeline of Ama/on1s acquisitions of 0appos. from the *irth of the possi*le transaction until the deal1s closing M&A #eal Announ!ed: In >uly +,,. Ama/on announced that it had reached an agreement to acquire 0appos in a deal that was #alued at 4576 million 8he ?urchase ?rice of the deal was financed with appro2imately 3, million shares of Ama/on common stock and 47, million of Cash and @estricted Stock units on the alance Sheet M&A #eal #eal Closed Closed:: In o#em* o#em*er er +,,. +,,. Ama/on Ama/on announ announced ced that that it had closed closed the pre#io pre#iously usly announced acquisition of 0appos Bi#en the closing price of Ama/on stock on the pre#ious riday ("cto*er <,. +,,). the deal was #alued at appro2imately 43+ *illion (including fees) $inan!ial Advisors
8wo in#estment *anks are enrolled in the merger process In April +,,. 0appos formally engaged Morgan Stanley as its lead financial financial ad#isor to a possi*le possi*le sale or strategic strategic relationship relationship 8hroughout 8hroughout April. 9a/ard met with with Ama/on Ama/on and ultimately *ecame *ecame the *uy-side ad#isor for for the transaction %ationale for t"e #eal
Shortly after the deal was announced. Ama/on filed an S-7 registration document with the SDC detailing the rationale of *oth parties for undertaking the deal 8heir reasoning was as follows ! !
Ama/on Ama/on *elie#ed *elie#ed that there was a tremendous tremendous opportunity opportunity to grow grow the the 0appos 0appos *rand 0appos 0appos was was interest interested ed in keeping keeping its its *rand and and culture culture intact intact.. and Ama/o Ama/on n supporte supported d its #ision as an independent company
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0appos felt it was in the *est interest of shareholders to sell *ased on current #aluations paid *y Ama/on
%aluations Methods sed Comparale Company Analysis
Morgan Stanley ran a Compara*le Company Analysis as part of the #aluation process when estimating the #alue of 0appos Compara*le Company Analysis is *ased on the idea that companies with similar characteristics should ha#e appro2imately similar #aluations Morgan Stanley compared the financial information of 0appos to that of pu*licly traded Compara*le Companies in the eCommerce space eCommerce companies used in Morgan Stanley1s Compara*le Company Analysis included the following Sele!ted Comparale Companies
! ! ! ! ! ! ! !
Ama/oncom. Inc lue ile Inc $igital @i#er Inc BSI Commerce Inc etfli2. Inc "pen8a*le. Inc "#erstockcom Inc %ista?rint 9td
or the analysis. Morgan Stanley looked at trading multiples in the eCommerce space for two key metrics of earnings forward DI8$A (the ratio of Enterprise Value to the next year’s e2pected Darnings efore Interest. 8a2es. $epreciation & Amorti/ation. or DI8$A) and forward Darnings ratio of Equity Value to next year’s e2pected et Income) ased on consensus estimates for calendar years +,, and +,3,. Morgan Stanley applied these ranges to the rele#ant 0appos financials #is!ounted Cas" $lo' Analysis
Morgan Stanley also calculated Dquity %alue ranges for 0appos *ased on $iscounted Cash low ($C) analysis $C models are often used in In#estment *anking deals to #alue a company or asset using the time #alue of money concept D2pected future cash flows are discounted *ack to today to gi#e the et ?resent %alue of those cash flows. which should appro2imate the current #alue of the underlying company or asset Components used in a #C$ Analysis ( ( (
Company1s ree Cash low (Morgan Stanley proEected out 3, years) Sol#ing for 8erminal %alue of the Company (Morgan Stanley uses the ?erpetuity Browth @ate approach) 'eighted A#erage Cost of Capital ($iscount @ate for the Company1s Dquity and $e*t. appro2imately weighted for the Company1s relati#e mi2 of $e*t and Dquity)
Morgan Stanley calculated a 8erminal %alue as of >uly 3. +,3 *y applying a ?erpetual Browth @ate range of <-7F and a $iscounted @ate range of 3+:-36:F 8he proEected ree Cash lows (unle#ered). $iscount @ates. and implied 8erminal %alue were then used to sol#e for the et ?resent %alue of 0appos1 e2pected future cash flows ased on the $C proEections. Morgan Stanley implied a 0appos Dquity %alue range of 43.:::-+.65: million 8he lower end of the sensiti#ity analysis implied a 0appos Dquity %alue of 47<, million. so the deal #alue was within the sensiti#ity range )re!edent ransa!tion Analysis
As part of the due-diligence process. Morgan Stanley also performed a ?recedent 8ransaction Analysis to imply a #alue for the company using recent historical M&A transactions of similar
companies ?recedent 8ransaction Analysis is *ased on the idea that recently acquired companies with similar characteristics should pro#ide a solid guideline for a reasona*le ?urchase ?rice for the gi#en 8arget company (in this case. 0appos) Morgan Stanley researched pu*licly a#aila*le M&A transactions looking at deal multiples in the Internet sector with a *uyout of 4+:, million or more since >anuary +,,5 8he following is a list of the transactions that Morgan Stanley analy/ed Sele!ted )re!edent ransa!tions *arget+A!,uirer-
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Bmarket IncGeay Inc ill Me 9ater. IncGeay Inc Breenfield "nline IncGMicrosoft Corporations e*o. IncG8ime 'arner Inc CD8 etworks. IncGCS Corporation Audi*le. IncGAma/oncom. Inc
sing the transactions chosen. Morgan Stanley selected ranges of deal multiples and applied those ranges of multiples to the appropriate 0appos financials Morgan Stanley applied a ne2t twel#e-month (8M) DI8$A range of appro2imately 3:-<,2 to 0appos financials. which implied an Dquity %alue range of 4:<,-3.3+, million Morgan Stanley applied a last-twel#e-month (98M) DI8$A range of appro2imately +:-6:2. implying an Dquity %alue range of 4+6,-55: million .istori!al Sto!k )ri!e & /e0t 'elve Mont"s */M- Multiple Analysis
Morgan Stanley also re#iewed Ama/on1s stock price performance relati#e to an eCommerce inde2. an Internet ellwether Inde2. and the AS$AH o#er #arious periods of time 8he following companies comprised the eCommerce inde2 eCommer!e Inde0 Components ( ( ( ( ( (
lue ile Inc $igital @i#er Inc BSI Commerce Inc etfli2. Inc "#erstockcom Inc %ista?rint 9td
8he following companies comprised the Internet ellwether inde2 1 )ri!e C"ange
Amazon
eCommer!e
Internet Bell'et"ers
/AS#A2
3ast 45 #ays
3+:,
3,:,
3:3,
5:,
3ast 65 #ays
3+7,
6,
353,
3=7,
3ast 785 #ays
65+,
33:,,
=++,
<,5,
3ast 79 Mont"s
<,,,
+<,,
(+3<,)
(3:,)
3ast 9 ears
+7<,
(3,,,)
(7+,,)
(+56,)
3ast 4 ears
3=5+,
736,
(++6,)
(:+,)
Internet Bell'et"er Inde0 Components ( ( (
eay Inc Boogle Inc ahooJ Inc
8he ta*le *elow shows Morgan Stanley1s analysis of stock price performance for these selected metrics Morgan Stanley then looked at recent trading multiples compared to ne2t-twel#e-months (8M) Darnings ?er Share and 8M DI8$A. as well as implied stock prices using these multiples. *ased on current 8M financials for Ama/on Morgan Stanley commented that o#er the period Ama/on stock traded at an 8M ?riceGDarnings multiple range of +3-772 and an 8M DI8$A range of 5+<+:2 $ootnote: Sele!ted Zappos;!om< In!; $inan!ial %esults Zappos;!om< In!;
955=
In!ome Statement< in > t"ousands
4 mont"s ended ?une 45
79 mont"s ended
/et revenues
7@9<74
@9<896
Cost of revenues
6=<7@8
444<88
ross )rofit
@@<@@
769<6@
Sales< marketing and fulfillment
4=<89
794<95
eneral and Administrative
@<8=5
78<69
)rodu!t #evelopment
<7@
78<99
otal operating e0pense
6<88
75<
In!ome from operations
@<@6
49<66
Interest and ot"er in!ome< net
744
=47
Interest enefit *e0pense- asso!iated 'it" preferred sto!k 'arrant
*@<==7-
*75<89@-
Ot"er interest e0pense
*7<5=-
*<645-
Ot"er finan!ing !"arges
*797-
*44@-
Operating e0penses:
In!ome *loss- efore provision for in!ome ta0es
*7<9@=-
7@<75
)rovision for in!ome ta0es
*7<@9-
*75<988-
/et in!ome *loss- from !ontinuing operations
*9<876-
<8@9
#is!ontinued operations< net of ta0
*=6-
*4<58-
/et in!ome *loss-
*4<68-
7<=8
