In an unexpected—and quirky—video announcement, Amazon is acquiring the shoe-seller-turned-everything-seller Zappos for $807 Million in stock (that number from the press release rose to $880 million by the market's close, plus Amazon allotted an additional $40 million in cash and stock for Zappos employees).
What's odd here is that Zappos was purchased for less than its annual revenue—which it claims was $1 billion last year. As Zappos expanded beyond its shoe-obsessed core, analysts began to anticipate that it would become a competitor to Amazon, leading one to speculate that Zappos' success—and ambition to build an e-commerce powerhouse—was beginning to look like a threat, albeit a long-range one.
But at the same time, in this economy Zappos' business model—which includes stocking huge inventories to enable faster shipping, and high shipping costs both ways—could become problematic.
Undoubtedly, the big winners today in this 10 million share stock swap are Zappos' investors, which include Sequoia Capital and Venture Frogs (which was co-founded by Tony Hsieh). At $88 per share, Amazon is still about 20% below its all time high of $106 per share—and analysts remain generally bullish on the company's outlook.
In today's announcements, both Bezos and Zappos CEO Tony Hsieh pay heed to the customer-focused core values that have been the hallmark of Hsieh's many keynote speeches. Zappos has implemented some undeniably innovative practices (paying people to not take a job!) in its 10-year history.
What's unclear, of course, is how the newly merged companies will mesh. Whose corporate culture will dominate when the merger is complete? Zappos, with its legion of hundreds of employee Twitterers, or Amazon, with no published telephone number? There are also technology issues. How will "Genghis"—Zappos' all-knowing warehouse and inventory management system—integrate with Amazon's tightly run, cloud-facing supply chain management tools? Zappos' back end is built on open source, and would require millions of dollars to recreate—but it's unclear whether any of that will be of use to Amazon.
There's also the question of how Zappos will fit into Amazon's overall business, given that Amazon already sells the same merchandise that Zappos does. Bezos doesn't have a great track record with acquisitions (Alexa, anyone?), and this is undoubtedly his most significant acquisition in the company's history.
Twitter exploded after the news broke—I'm seeing hundreds of tweets per minute on the topic since Hsieh's 4:30 announcement. Until we learn more, watch this video in which Amazon CEO Jeff Bezos divulges, "everything I know" in 8 minutes. "It's a short list."
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Here's Tony Hsieh's letter to employees:
Date: Wed, 22 Jul 2009
From: Tony Hsieh (CEO - Zappos.com)
To: All Zappos Employees
Subject: Zappos and Amazon
Please set aside 20 minutes to carefully read this entire email. (My apologies for the occasional use of formal-sounding language, as parts of it are written in a particular way for legal reasons.)
Today is a big day in Zappos history.
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.
Over the next few days, you will probably read headlines that say "Amazon acquires Zappos" or "Zappos sells to Amazon". While those headlines are technically correct, they don't really properly convey the spirit of the transaction. (I personally would prefer the headline "Zappos and Amazon sitting in a tree…")
We plan to continue to run Zappos the way we have always run Zappos — continuing to do what we believe is best for our brand, our culture, and our business. From a practical point of view, it will be as if we are switching out our current shareholders and board of directors for a new one, even though the technical legal structure may be different.
We think that now is the right time to join forces with Amazon because there is a huge opportunity to leverage each other's strengths and move even faster towards our long term vision. For Zappos, our vision remains the same: delivering happiness to customers, employees, and vendors. We just want to get there faster.
We are excited about doing this for 3 main reasons:
1) We think that there is a huge opportunity for us to really accelerate the growth of the Zappos brand and culture, and we believe that Amazon is the best partner to help us get there faster.
2) Amazon supports us in continuing to grow our vision as an independent entity, under the Zappos brand and with our unique culture.
3) We want to align ourselves with a shareholder and partner that thinks really long term (like we do at Zappos), as well as do what’s in the best interest of our existing shareholders and investors.
I will go through each of the above points in more detail below, but first, let me get to the top 3 burning questions that I'm guessing many of you will have.
TOP 3 BURNING QUESTIONS
Q: Will I still have a job?
As mentioned above, we plan to continue to run Zappos as an independent entity. In legal terminology, Zappos will be a "wholly-owned subsidiary" of Amazon. Your job is just as secure as it was a month ago.
Q: Will the Zappos culture change?
Our culture at Zappos is unique and always evolving and changing, because one of our core values is to Embrace and Drive Change. What happens to our culture is up to us, which has always been true. Just like before, we are in control of our destiny and how our culture evolves.
A big part of the reason why Amazon is interested in us is because they recognize the value of our culture, our people, and our brand. Their desire is for us to continue to grow and develop our culture (and perhaps even a little bit of our culture may rub off on them).
They are not looking to have their folks come in and run Zappos unless we ask them to. That being said, they have a lot of experience and expertise in a lot of areas, so we're very excited about the opportunities to tap into their knowledge, expertise, and resources, especially on the technology side. This is about making the Zappos brand, culture, and business even stronger than it is today.
Q: Are Tony, Alfred, or Fred leaving?
No, we have no plans to leave. We believe that we are at the very beginning of what's possible for Zappos and are very excited about the future and what we can accomplish for Zappos with Amazon as our new partner. Part of the reason for doing this is so that we can get a lot more done more quickly.
There is an additional Q&A section at the end of this email, but I wanted to make sure we got the top 3 burning questions out of the way first. Now that we've covered those questions, I wanted to share in more detail our thinking behind the scenes that led us to this decision.
First, I want to apologize for the suddenness of this announcement. As you know, one of our core values is to Build Open and Honest Relationships With Communication, and if I could have it my way, I would have shared much earlier that we were in discussions with Amazon so that all employees could be involved in the decision process that we went through along the way. Unfortunately, because Amazon is a public company, there are securities laws that prevented us from talking about this to most of our employees until today.
We've been on friendly terms with Amazon for many years, as they have always been interested in Zappos and have always had a great respect for our brand.
Several months ago, they reached out to us and said they wanted to join forces with us so that we could accelerate the growth of our business, our brand, and our culture. When they said they wanted us to continue to build the Zappos brand (as opposed to folding us into Amazon), we decided it was worth exploring what a partnership would look like.
We learned that they truly wanted us to continue to build the Zappos brand and continue to build the Zappos culture in our own unique way. I think "unique" was their way of saying "fun and a little weird." :)
Over the past several months, as we got to know each other better, both sides became more and more excited about the possibilities for leveraging each other's strengths. We realized that we are both very customer-focused companies — we just focus on different ways of making our customers happy.
Amazon focuses on low prices, vast selection and convenience to make their customers happy, while Zappos does it through developing relationships, creating personal emotional connections, and delivering high touch ("WOW") customer service.
We realized that Amazon's resources, technology, and operational experience had the potential to greatly accelerate our growth so that we could grow the Zappos brand and culture even faster. On the flip side, through the process Amazon realized that it really was the case that our culture is the platform that enables us to deliver the Zappos experience to our customers. Jeff Bezos (CEO of Amazon) made it clear that he had a great deal of respect for our culture and that Amazon would look to protect it.
We asked our board members what they thought of the opportunity. Michael Moritz, who represents Sequoia Capital (one of our investors and board members), wrote the following: "You now have the opportunity to accelerate Zappos' progress and to make the name and the brand and everything associated with it an enduring, permanent part of peoples' lives... You
are now free to let your imagination roam - and to contemplate initiatives and undertakings that today, in our more constrained setting, we could not take on."
One of the great things about Amazon is that they are very long term thinkers, just like we are at Zappos. Alignment in very long term thinking is hard to find in a partner or investor, and we felt very lucky and excited to learn that both Amazon and Zappos shared this same philosophy.
All this being said, this was not an easy decision. Over the past several months, we had to weigh all the pros and cons along with all the potential benefits and risks. At the end of the day, we realized that, once it was determined that this was in the best interests of our shareholders, it basically all boiled down to asking ourselves 2 questions:
1) Do we believe that this will accelerate the growth of the Zappos brand and help us fulfill our mission of delivering happiness faster?
2) Do we believe that we will continue to be in control of our own destiny so that we can continue to grow our unique culture?
After spending a lot of time with Amazon and getting to know them and understanding their intentions better, we reached the conclusion that the answers to these 2 questions are YES and YES.
The Zappos brand will continue to be separate from the Amazon brand. Although we'll have access to many of Amazon’s resources, we need to continue to build our brand and our culture just as we always have. Our mission remains the same: delivering happiness to all of our stakeholders, including our employees, our customers, and our vendors. (As a side note, we plan to continue to maintain the relationships that we have with our vendors ourselves, and Amazon will continue to maintain the relationships that they have with their vendors.)
We will be holding an all hands meeting soon to go over all of this in more detail. Please email me any questions that you may have so that we can cover as many as possible during the all hands meeting and/or a follow-up email.
We signed what's known as the "definitive agreement" today, but we still need to go through the process of getting government approval, so we are anticipating that this transaction actually won't officially close for at least a few months. We are legally required by the SEC to be in what's known as a "quiet period", so if you get any questions related to the transaction from anyone including customers, vendors, or the media, please let them know that we are in a quiet period mandated by law and have them email firstname.lastname@example.org, which is a special email account that Alfred and I will be monitoring.
Alfred and I would like to say thanks to the small group of folks on our finance and legal teams and from our advisors at Morgan Stanley, Fenwick & West, and PricewaterhouseCoopers who have been working really hard, around the clock, and behind the scenes over the last several months to help make all this possible.
Before getting to the Q&A section, I'd also like to thank everyone for taking the time to read this long email and for helping us get to where we are today.
It’s definitely an emotional day for me. The feelings I’m experiencing are similar to what I felt in college on graduation day: excitement about the future mixed with fond memories of the past. The last 10 years were an incredible ride, and I'm excited about what we will accomplish together over the next 10 years as we continue to grow Zappos!
CEO - Zappos.com
Q: Will we still continue to grow our headquarters out of Vegas?
Yes! Just like before, we plan to continue to grow our Las Vegas operations as long as we can continue to attract the right talent for each of our departments. We do not have any plans to move any departments, nor does Amazon want us to because they recognize that our culture is what makes the Zappos brand special.
Q: What will happen to our warehouse in Kentucky?
As many of you know, we were strategic in choosing our warehouse location due to its proximity to the UPS Worldport hub in Louisville. Amazon does not have any warehouse locations that are closer to the Worldport hub. There is the possibility that they may want to store some of their inventory in our warehouse or vice-versa. Right now, both Zappos and Amazon believe that the best customer experience is to continue running our warehouse in Kentucky at its current location.
Q: Will we be reducing staff in order to gain operational efficiency?
There are no plans to do so at this time. Both Zappos and Amazon are focused on growth, which means we will need to hire more people to help us grow.
Q: Will we get a discount at Amazon?
No, because we are planning on continuing to run Zappos as a separate company with our own culture and core values. And we're not going to be giving the Zappos discount to Amazon employees either, unless they bake us cookies and deliver them in person.
Q: Will our benefits change?
No, we are not planning on making any changes (outside of the normal course of business) to our benefit packages.
Q: Do we keep our core values?
Yes, we will keep our core values, and Amazon will keep their core values.
Q: Will our training/pipeline programs or progression plans change? Will there still be more growth opportunities?
We will continue building out our pipeline and progression as planned. The whole point of this combination is to accelerate our growth, so if anything, we are actually anticipating more growth opportunities for everyone.
Q: Will we continue to do the special things we do for our customers? Are our customer service policies going to change?
Just like before, that's completely up to us to decide.
Q: Can you tell me a bit more about Jeff Bezos (Amazon CEO)? What is he like?
We’d like to show an 8-minute video of Jeff Bezos that will give you some insight into his personality and way of thinking. He shares some of what he’s learned as an entrepreneur, as well as some of the mistakes he’s made.