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  • 07.22.09

Amazon Buys Zappos for $847 Million [updated]

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).

Amazon Buys Zappos for $847 Million [updated]

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).

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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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If you have any details to add, please email us at ideas@fastcompany.com.

 

Related:
The Evolution of Amazon
Fast Company 50: Amazon
Fast Company 50: Zappos

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 tree@zappos.com, 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!

-Tony Hsieh

CEO – Zappos.com

Q&A

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.

 

 

About the author

I'm the executive editor of Fast Company and Co.Design.

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