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Zappos.com, an internet retailer that launched in 1999, survived the .com bust and went on to become the number one online footwear seller, has been purchased by Amazon.com in a mostly-stock deal worth over $900m.

Amazon plans to run Zappos as a wholly-owned subsidiary, with its new acquisition maintaining its own branding and separate operations.

Zappos is, of course, best-known in some circles for its corporate culture and extensive use of social media (CEO Tony Hsieh has over 1m followers on Twitter). Both are reflective of the company's focus on customer service. From free shipping both ways to a warehouse that operates 24x7, Zappos owes much of its success to its treatment of customers.

In a letter to employees, Hsieh reiterated that there were no plans to switch recipes:

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.

He went on to state that Amazon will primarily contribute its "knowledge, expertise and resources" and that Zappos might even teach Amazon a thing or two.

Needless to say, the size of this deal gave the media, blogosphere and Twittersphere good reason to buzz. As the recession has slowed M&A significantly, there haven't been a whole lot of consumer internet and ecommerce megadeals to swoon over. And this was a megadeal. At Amazon's closing price of $88.79 yesterday, the transaction is valued at close to $930m in total. Zappos is believed to have pulled in over $1bn in revenue in 2008 and according to a peHUB source, generated at least $40m in EBIDTA.

But in context, the deal isn't as big as it may appear numbers-wise. As one of the few .coms to survive the bust that forced so many pure-play ecommerce startups to close their doors, Zappos has been through its fair share of funding -- more rounds than you can count on a single hand.

And not everyone may have wanted the sale. peHUB reports that Hsieh would have preferred Zappos remain independent. But Sequoia Capital, which made its first investment in the company in its Series E round in late 2004, apparently charged a hefty fee in the form of a "very high" liquidation preference -- 3x - 3.5x according to an anonymous Zappos shareholder who told peHUB he had seen the company's capitalization tables. Such a liquidation preference would give Sequoia a significant incentive to pressure a sale.

That said, even then the Wall Street Journal figures that Sequoia may not have done as well on this exit as it has in the past. But that's all relative. Given the economy, Zappos' management many of its investors probably don't have much reason to complain. This was a good exit.

The question now is how well Amazon will handle the acquisition and whether Zappos management, namely CEO Hsieh, will stay put. The former is probably dependent on Amazon's ability to leave Zappos be. The latter may be dependent upon what opportunities arise for Hsieh. Zappos isn't his first big win; the 34 year-old entrepreneur sold his previous company, LinkExchange, to Microsoft for $265m in 1998.

Photo credit: theritters via Flickr.

Patricio Robles

Published 23 July, 2009 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2392 more posts from this author

Comments (2)

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Thomas Crown

This is a great acquisition for Amazon

about 7 years ago

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Isaac | Go Blogger (dot) net

That's an intelligent act. However, Amazon needs to be careful there, wrong policy can ruind Zappo's performance. Wrong?

about 7 years ago

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