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In this Case Study module we will discuss three key aspects of understanding a real-life Mergers & Acquisitions (M&A) deal:
Company Overviews
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 time the deal was announced) and $40 million in cash. The M&A deal was 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 online 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.
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The following graphic illustrates the timeline of Amazon’s acquisition 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
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).
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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.
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.
Zappos felt it was in the best interest of shareholders to sell based on current valuations paid by Amazon.
Morgan Stanley ran a Comparable Company Analysis as part of the valuation process when estimating the value of Zappos. Comparable
Company Analysis is based on the idea that companies with similar characteristics should have approximately similar valuations. Morgan
Stanley compared the financial information of Zappos to that of publicly traded Comparable Companies in the eCommerce space.
eCommerce companies used in Morgan Stanley’s Comparable Company Analysis included the following:
Amazon.com, Inc.
Blue Nile Inc.
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Netflix, Inc.
OpenTable, Inc.
Overstock.com Inc.
VistaPrint Ltd.
For the analysis, Morgan Stanley looked at trading multiples in the eCommerce space for two key metrics of earnings: forward EBITDA (the ratio
of Enterprise Value to next year’s expected Earnings Before Interest, Taxes, Depreciation & Amortization, or EBITDA) and forward Earnings
(ratio of Equity Value to next year’s expected Net Income). Based on consensus estimates for calendar years 2009 and 2010, Morgan Stanley
applied these ranges to the relevant Zappos financials.
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Morgan Stanley also calculated Equity Value ranges for Zappos based on Discounted Cash Flow (DCF) analysis. DCF models are often used in
Investment Banking deals to value a company or asset using the time value of money concept. Expected future cash flows are discounted back to
today to give the Net Present Value of those cash flows, which should approximate the current value of the underlying company or asset.
Weighted Average Cost of Capital (Discount Rate for the Company’s Equity and Debt, appropriately weighted for the Company’s relative
Morgan Stanley calculated a Terminal Value as of July 1, 2019 by applying a Perpetual Growth Rate range of 3-4% and a Discount Rate range of
12.5-17.5%. The projected Free Cash Flows (unlevered), Discount Rates, and implied Terminal Value were then used to solve for the Net Present
Value of Zappos’ expected future cash flows. Based on the DCF projections, Morgan Stanley implied a Zappos Equity Value range of $1,555-
2,785 million. The lower end of the sensitivity analysis implied a Zappos Equity Value of $430 million, so the deal value was within the
sensitivity range.
As part of the due-diligence process, Morgan Stanley also performed a Precedent Transaction Analysis to imply a value for the company using
recent historical M&A transactions of similar companies. 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, Zappos).
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. The following is a list of the transactions that Morgan Stanley analyzed:
Using the transactions chosen, Morgan Stanley selected ranges of deal multiples and applied those ranges of multiples to the appropriate Zappos
financials. Morgan Stanley applied a next-twelve-month (NTM) EBITDA range of approximately 15-30x to Zappos financials, which implied an
Equity Value range of $530-1,120 million. Morgan Stanley applied a last-twelve-month (LTM) EBITDA range of approximately 25-75x, implying
an Equity Value range of $270-885 million.
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HISTORICAL STOCK PRICE & NEXT TWELVE MONTHS (NTM) MULTIPLE ANALYSIS
Morgan Stanley also reviewed Amazon’s stock price performance relative to an eCommerce index, an Internet Bellwether Index, and the
NASDAQ over various periods of time. The following companies comprised the eCommerce index:
Netflix, Inc.
Overstock.com, Inc.
VistaPrint Ltd.
eBay Inc.
Google Inc.
Yahoo! Inc.
The table below shows Morgan Stanley’s analysis of stock price performance for these selected metrics:
Internet
% Price Change Amazon eCommerce NASDAQ
Bellwethers
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Morgan Stanley then looked at recent trading multiples compared to next-twelve-months (NTM) Earnings Per Share and NTM EBITDA, as well
as implied stock prices using these multiples, based on current NTM financials for Amazon. Morgan Stanley commented that over the period
Amazon stock traded at an NTM Price/Earnings multiple range of 21.9-94.4x and an NTM EBITDA range of 8.2-32.5x.
3 months
12 months 6 months 12 months 3 months 6 months
Income Statement, in $ thousands ended June
ended Dec 31 ended June ended Dec 31 ended June 30 ended June 30
30
Operating expenses:
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Sales, marketing and fulfillment 37,862 123,260 70,792 153,285 36,870 71,688
Interest and other income, net 133 731 325 559 101 173
Provision for income taxes (1,562) (10,288) (1,550) (5,208) (3,343) (4,356)
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