M&A Case Study: Amazon and ZapposStreet Of Walls Investment Banking Technical Training In this Case Study module we will discuss three key aspects of understanding of a real-life Mergers & Acquisitions (M&A) deal: • • • Company Overviews Merger Deal Overview Valuation Methods Used We will take a deep look into the large M&A deal that took place in the eCommerce sector. In November 2009, Amazon, Inc. completed a previously announced acquisition of Zappos.com Inc. Under the terms of the deal, Amazon paid Zappos.com’s shareholders approximately 10 million shares of Amazon stock (valued at $807 million at the time the deal was announced) and $40 million in cash. The M&A deal were advised by investment banking teams at Morgan Stanley (Zappos) and Lazard (Amazon). Company Overviews Amazon.com is a customer-centric company for three kinds of customers: consumers, sellers and enterprises. The Company serves consumers through its retail websites, and focus on selection, price, and convenience. It also provides easy-to-use functionality, fulfillment and customer service. Amazon is the largest retailer in the nation, with revenues exceeding $45 billion annually. Zappos.com was the #1 online seller of shoes at the time of the deal, stressing customer service. It stocks 3 million pairs of shoes, handbags, apparel and accessories, specializing in some 1,000 brands that are difficult to find in mainstream shopping malls. Through its website (and 7,000 affiliate partners), Zappos.com distributes stylish and moderately priced footwear to frustrated and shop-worn customers nationwide. In 2008, one year prior to the deal, Zappos reported annual revenues exceeding $630 million. Merger Deal Overview The following graphic illustrates the timeline of Amazon’s acquisitions of Zappos, from the birth of the possible transaction until the deal’s closing: M&A Deal Announced: In July 2009, Amazon announced that it had reached an agreement to acquire Zappos in a deal that was valued at $847 million. The Purchase Price of the deal was financed with approximately 10 million shares of Amazon common stock and $40 million of Cash and Restricted Stock units on the Balance Sheet. M&A Deal Closed: In November 2009, Amazon announced that it had closed the previously announced acquisition of Zappos. Given the closing price of Amazon stock on the previous Friday (October 30, 2009), the deal was valued at approximately $1.2 billion (including fees). Financial Advisors Two investment banks are enrolled in the merger process. In April 2009, Zappos formally engaged Morgan Stanley as its lead financial advisor to a possible sale or strategic relationship. Throughout April, Lazard met with Amazon and ultimately became the buy-side advisor for the transaction. Rationale for the Deal Shortly after the deal was announced, Amazon filed an S-4 registration document with the SEC detailing the rationale of both parties for undertaking the deal. Their reasoning was as follows: • • Amazon believed that there was a tremendous opportunity to grow the Zappos brand. Zappos was interested in keeping its brand and culture intact, and Amazon supported its vision as an independent company. Morgan Stanley implied a Zappos Equity Value range of $1. Components used in a DCF Analysis • • • Company’s Free Cash Flow (Morgan Stanley projected out 10 years) Solving for Terminal Value of the Company (Morgan Stanley uses the Perpetuity Growth Rate approach) Weighted Average Cost of Capital (Discount Rate for the Company’s Equity and Debt. Valuations Methods Used Comparable Company Analysis Morgan Stanley ran a Comparable Company Analysis as part of the valuation process when estimating the value of Zappos. Discounted Cash Flow Analysis Morgan Stanley also calculated Equity Value ranges for Zappos based on Discounted Cash Flow (DCF) analysis. Based on consensus estimates for calendar years 2009 and 2010. or EBITDA) and forward Earnings 9ratio of Equity Value to next year’s expected Net Income).5-17. Morgan Stanley looked at trading multiples in the eCommerce space for two key metrics of earnings: forward EBITDA (the ratio of Enterprise Value to the next year’s expected Earnings Before Interest. approximately weighted for the Company’s relative mix of Debt and Equity) Morgan Stanley calculated a Terminal Value as of July 1. Digital River Inc. The lower end of the sensitivity analysis implied a Zappos Equity Value of $430 million. 2019 by applying a Perpetual Growth Rate range of 3-4% and a Discounted Rate range of 12. The projected Free Cash Flows (unlevered).555-2.5%.785 million. Taxes. VistaPrint Ltd. Overstock. eCommerce companies used in Morgan Stanley’s Comparable Company Analysis included the following: Selected Comparable Companies • • • • • • • • Amazon. which should approximate the current value of the underlying company or asset. Morgan Stanley applied these ranges to the relevant Zappos financials. For the analysis. Comparable Company Analysis is based on the idea that companies with similar characteristics should have approximately similar valuations. Based on the DCF projections. Blue Nile Inc. Precedent Transaction Analysis As part of the due-diligence process. Expected future cash flows are discounted back to today to give the Net Present Value of those cash flows. Inc. DCF models are often used in Investment banking deals to value a company or asset using the time value of money concept. Morgan Stanley compared the financial information of Zappos to that of publicly traded Comparable Companies in the eCommerce space. and implied Terminal Value were then used to solve for the Net Present Value of Zappos’ expected future cash flows. Morgan Stanley also performed a Precedent Transaction Analysis to imply a value for the company using recent historical M&A transactions of similar . so the deal value was within the sensitivity range. GSI Commerce Inc.• Zappos felt it was in the best interest of shareholders to sell based on current valuations paid by Amazon. Inc. OpenTable. Discount Rates. Inc. Netflix.com.com Inc. Depreciation & Amortization. com. Inc. CNET Networks.companies./Amazon. Bill Me Later. Precedent Transaction Analysis is based on the idea that recently acquired companies with similar characteristics should provide a solid guideline for a reasonable Purchase Price for the given Target company (in this case.50 Last 90 Days 12. Overstock.20 30. an Internet Bellwether Index.com. Morgan Stanley selected ranges of deal multiples and applied those ranges of multiples to the appropriate Zappos financials.10 8.20 115. Morgan Stanley applied a last-twelve-month (LTM) EBITDA range of approximately 25-75x. Inc.00 (21.70) (5.00) (42.20) .10 16. Inc./Microsoft Corporations Bebo. Inc.90) Last 2 Years 24./eBay Inc. Inc. Zappos). Inc. VistaPrint Ltd. The following companies comprised the Internet Bellwether index: % Price Change Amazon eCommerce Internet Bellwethers NASDAQ Last 30 Days 12. Inc.40 Last 180 Days 78. The following is a list of the transactions that Morgan Stanley analyzed: Selected Precedent Transactions (Target/Acquirer) • • • • • • Gmarket Inc.120 million. GSI Commerce Inc.40 7. Digital River Inc. Morgan Stanley researched publicly available M&A transactions looking at deal multiples in the Internet sector with a buyout of $250 million or more since January 2008. and the NASDAQ over various periods of time. Historical Stock Price & Next Twelve Months (NTM) Multiple Analysis Morgan Stanley also reviewed Amazon’s stock price performance relative to an eCommerce index.00) (28./eBay Inc.70 (22.30) (15. Morgan Stanley applied a next twelve-month (NTM) EBITDA range of approximately 15-30x to Zappos financials. implying an Equity Value range of $270-885 million./Time Warner Inc.30 (10. Using the transactions chosen.70) Last 3 Years 168. Netflix.80 Last 12 Months 30.00 23./CBS Corporation Audible.20 41.50 15.90 18. Greenfield Online Inc.00 62.50 10. The following companies comprised the eCommerce index: eCommerce Index Components • • • • • • Blue Nile Inc. which implied an Equity Value range of $530-1. com. in $ thousands 3 months ended June 30 12 months ended D Net revenues 152.613 526.886 160.569 32.825) Other interest expense (1.829 Cost of revenues 97.224 Total operating expense 49.499 Interest and other income.260 General and Administrative 5.962 Product Development 6. Inc.930) Other financing charges (121) (335) Operating expenses: . Footnote: Selected Zappos.9-94.067) (6. marketing and fulfillment 37. based on current NTM financials for Amazon.446 Income from operations 5. as well as implied stock prices using these multiples.com. Google Inc.Internet Bellwether Index Components • • • eBay Inc.862 123.232. Inc. net 133 731 Interest benefit (expense) associated with preferred stock warrant (5.5x. 2007 Income Statement.870 18.945 Sales.771) (10.154 18.158 333.455 192.4x and an NTM EBITDA range of 8. Yahoo! Inc The table below shows Morgan Stanley’s analysis of stock price performance for these selected metrics: Morgan Stanley then looked at recent trading multiples compared to next-twelve-months (NTM) Earnings Per Share and NTM EBITDA. Morgan Stanley commented that over the period Amazon stock traded at an NTM Price/Earnings multiple range of 21. Financial Results Zappos.884 Gross Profit 55. 852 Discontinued operations.084) Net income (loss) (3.819) 4.288) Net income (loss) from continuing operations (2. net of tax (679) (3.140 Provision for income taxes (1.768 .257) 15.Income (loss) before provision for income taxes (1.562) (10.498) 1.