Unready to step on the stage, Blue Apron is unlikely to step off

Contact: Brenon Daly

Welcome to Wall Street, Blue Apron, but what are you doing here? That’s a question making the rounds among a few investors Thursday as the meal delivery outfit publicly reported financial results for the first time since its IPO. And how were Blue Apron’s numbers? Well, suffice to say that the company’s shares, which have been underwater since the offering in late June, sank even further. In roughly six weeks as a public company, Blue Apron has lost nearly half of its value.

Rather than specifically look at the top line or the mess of red ink that Blue Apron reported for its second quarter, it might be worthwhile to focus on a broader point that might have been lost in the quarterly song and dance: Blue Apron probably should have never come public in the first place. The five-year-old company was simply not mature enough to join the NYSE.

But since Blue Apron — needing the cash — went through with the offering, it finds itself in the very awkward position of casting around to find a way to be a sustainable business, and doing it in front of the whole world. Everyone gets to see all of the missteps: the sequential decline in customers and orders, the costs rising faster than sales, the employee layoffs. It’s a bit like a teenager going through the clumsy, fitful process of growing up while on a stage.

However, the company doesn’t appear to going anywhere, with CEO Matt Salzberg saying Blue Apron is committed to building ‘an iconic consumer brand.’ And he’s taken steps toward that goal. Although the IPO very much represented a ‘down round’ for Blue Apron, it nonetheless adds nearly $280m to its treasury. That buys a fair amount of time, as does the company’s dual-class structure of shares, which effectively makes it impossible for shareholders — who, don’t forget, are the actual owners of Blue Apron — to force it to consider any strategies from outside.

For both financial and philosophical reasons, an imminent sale of Blue Apron is unlikely. Nonetheless, we would hasten to add that at its current valuation, shares are priced to move. Wall Street currently values the company at about $1bn, which we could use as an approximate enterprise value (EV) for any hypothetical transaction. (By our rough-and-tough math, we assume that backing out Blue Apron’s cash from the purchase price would be offset by an acquisition premium.)

At roughly $1bn, Blue Apron’s net cost would be less than the $1.1bn it will likely put up in sales this year. That’s a smidge below the average EV/sales multiple of nearly 1.3x in the handful of internet retailers that have been erased from Wall Street since the start of 2015, according to 451 Research’s M&A KnowledgeBase. As those exit multiples suggest, merely becoming an iconic consumer brand doesn’t necessarily pay off.

Don’t bet against Bezos

Contact: Brenon Daly

A day after Amazon’s Jeff Bezos put out an open-ended tweet to the world asking where he should donate his money, we now know at least one early recipient of his philanthropy: Whole Foods Market. OK, the $13.7bn acquisition of the grocer isn’t exactly charity, but nor is it an example of a hardened dollars-and-cents M&A strategy.

Instead, it might be most accurate to think of the Amazon-Whole Foods pairing as a blend of giving and buying, a deal that’s being attempted by one of the few CEOs who could possibly get away with spending billions of dollars of shareholder money to effectively take his company backward in time. For lack of a better term, think of Bezos’ move as a ‘patronage purchase.’

Whole Foods, which was being stung by a gadfly hedge fund, needed a buyer for the 430-store chain. (From our side, we were half expecting the grocery chain’s CEO, John Mackey, to try a Kickstarter-funded management buyout.) Amazon — or more accurately, Bezos — is convinced that the world’s largest online retailer needs a brick-and-mortar presence.

Undoubtedly, there’s a certain logic to building up the distribution network for physical goods, which account for the bulk of Amazon’s revenue. However, those sales aren’t particularly attractive, at least economically. To put some numbers on that, consider the operations for Whole Foods, a real-world business that Amazon is buying, compared with AWS, a cloud business that Amazon has built. Conveniently, both businesses generated roughly the same amount of revenue in the most recent quarter, $3.7bn. Leave aside the fact that AWS grew 43% while Whole Foods flatlined and just look at the operating margin: Whole Foods posted just $171m of operating income, only one-fifth the $890m that AWS generated.

Conventional corporate strategy would typically encourage a company to allocate resources to the business with the highest return (AWS), rather than spending billions of dollars to buy its way into a low-growth, low-margin adjacent market. But then, Bezos has never been conventional.

Historians will remember that Bezos pushed ahead with a $1.25bn convertible note offering for Amazon in 1999. At the time, the deal — the largest-ever convertible by a tech vendor — flew in the face of conventional corporate finance, giving those investors bearish on the money-burning company even more reason to mock ‘Amazon dot bomb.’ However, given that those notes converted at a price of $156 each, compared with the current market price for Amazon shares of nearly $1,000 each, it’s fair to say that Bezos has created a certain amount of goodwill on Wall Street. (Investors gave him the benefit of the doubt on the Whole Foods pickup, nudging Amazon shares slightly higher after the announcement.)

Similarly, by all accounts, Bezos’ purchase of the existentially threatened The Washington Post in 2013 has brought renewed growth to that stalwart newspaper. And while that $250m acquisition was done from Bezos’ own pocket (rather than Amazon’s treasury), it actually lines up fairly closely with the proposed reach for Whole Foods. Both groceries and newspapers represent once-thriving industries that have been decimated by a combination of technology and shifting consumer consumption patterns. In contrast, Amazon has built a half-trillion-dollar market cap on both of those trends, making it hard to bet against Bezos.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

E-commerce’s discounted disruptors

Contact: Brenon Daly 

For the second time in as many weeks, a would-be digital disruptor of the commerce world has been snapped up on the cheap by an analogue antecedent. After the closing bell on Monday, sprawling marketing giant Harland Clarke Holdings, the owner of a number of advertising flyers that clutter postal boxes and newspapers, said it would pay $630m for online coupon site RetailMeNot. The amount is just one-quarter the price Wall Street had put on the company three years ago.

The markdown on RetailMeNot comes just days after Samsonite gobbled up eBags, a dot-com survivor that nonetheless sold for a paltry multiple. The $105m acquisition is supposed to help the world’s largest maker of luggage sell directly to consumers. Samonsite, which traces its roots back more than a century, certainly didn’t overpay for that digital know-how. Its purchase values eBags at just 0.7x trailing sales.

While a bit richer, RetailMeNot is still only valued at 2.25x trailing sales and 2x forecast sales in the bid from Harland Clarke. And that’s for a sizable company that’s growing in the low-teens range (eBags is about half the size of RetailMeNot but is growing at twice that rate). The valuations paid by the old-world acquirers of both of these online retail startups were clearly shaped more by the staid retail world than the supercharged multiples generally paid for online assets. It’s a reminder, once again, that disruption – that clichéd goal of much of Silicon Valley – doesn’t necessarily generate value. Sometimes trying to knock a market on its head just gives everyone involved a headache.

Will Wal-Mart be the next to discount its e-commerce deal?

by Brenon Daly

The retail industry is learning the costly lesson that clicking an online shopping cart button has relatively little in common with pushing a shopping cart down a store aisle. The deals that retailers have struck to bridge the physical and digital worlds just haven’t been ringing the cash registers. The latest example: Nordstrom wrote off more than half of its $350m acquisition of Trunk Club.

It wasn’t supposed to be this way. The ‘bricks and clicks’ pairings made sense, at least in the pitchbook. Retailers needed to be more represented in places where their customers were actually shopping. (The National Retail Federation recently forecast that a record 56% of shoppers plan to buy online this upcoming holiday season, tying for the top spot among all customer destinations.)

In addition to the need to go digital, buyers were also lulled into a false sense of confidence by oversimplifying the fundamental premise of these proposed deals: Acquire a complementary Web-based storefront, with all of the accompanying technology and talent, and then just slap that in front of the massive back end that the big retailer has already built.

These theoretical transactions seemed a perfect fit, taking care of the specific challenges each vendor felt in its particular model. For the e-tailer, creating supply chains and delivery centers would likely cost tens if not hundreds of millions of dollars of capital expenditure, which is rarely a high-returning use of risk capital such as VC. (Not to mention those venture dollars, in general, are getting harder to pull in.) For retailers, they would get the digital smarts around marketing and selling on the Web, without having to painstakingly repurpose existing resources or slowly hire scarce digital talent.

And yet, that has turned out to be a spurious strategy. Online retailing isn’t any more of an extension of traditional retailing than online media is an extension of traditional media. With Nordstrom’s tacit admission that its M&A push into the ether hasn’t generated the expected returns, we wonder about a significantly larger bet – roughly 10 times the size of Nordstrom’s purchase of Trunk Club – that Wal-Mart has placed on Jet.com.

The retailing giant’s pickup of Jet.com last August stands as the largest e-commerce transaction of the past 15 years and the biggest sale of a VC-backed startup in two and a half years. However, the early returns on that blockbuster pairing don’t appear promising. In a survey by 451 Research’s Voice of the Connected User Landscape in mid-September, just after Wal-Mart closed the deal, more people projected they’d be spending less at Jet.com than spending more at the website through the end of the year.

cw-online-retailer-forecastSource: 451 Research’s Voice of the Connected User Landscape

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Ritchie Bros. scoops up IronPlanet amid increased activity from non-tech buyers

Contact: Scott Denne

Ritchie Bros. Auctioneers’ $759m reach for heavy-equipment commerce site IronPlanet marks the latest technology deal by a non-tech acquirer. Today’s acquisition helps demolish previous records of non-tech buyers in the tech market. According to 451 Research’s M&A KnowledgeBase, such shoppers have spent $33.7bn since the start of the year, more than $4bn over any other full year since 2006.

Not only are non-tech acquirers paying more, the strategy behind their transactions is changing. With the acquisition of IronPlanet, Ritchie hopes to bring in new customers with different preferences for buying and selling heavy equipment. IronPlanet offers a mix of white-label websites for dealers, different auction formats and additional partnerships that Ritchie doesn’t have today. What it isn’t obtaining is an online presence. More than half of Ritchie’s auction proceeds already come through online sales.

That same dynamic – the desire to reach a new set of customers via a technology acquisition – was also a driver of deals earlier this summer. Walmart’s $3.3bn purchase of Jet.com and Unilever’s $1bn pickup of Dollar Shave Club were both targeted at opening new market segments to those companies. Compare that with earlier non-tech transactions in the retail space, such as Nordstrom’s acquisition of HauteLook ($180m) in 2011 and Walgreen’s purchase of Drugstore.com ($429m) that same year. Both of those deals aimed to provide a new channel of services for customers already served by those retailers. Non-tech acquirers are moving from defense to offense, and spending more in the process.

Source: 451 Research’s M&A KnowledgeBase

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Walmart fuels e-commerce strategy with $3.3bn Jet.com buy

Contact: Scott Denne

Walmart prints the largest-ever e-commerce deal with its $3.3bn purchase of Jet.com. The acquisition helps Walmart fill specific gaps in its business and, more broadly, highlights the growing role of M&A among consumer-facing businesses that need to change their strategies to connect with a more connected population.

The world’s biggest retailer has struggled to achieve growth in recent years. Last year’s sales were down a hair and in the two previous years it posted just 2% growth, amid rising expenses. Part of its strategy to change that trend is to invest in e-commerce. However, e-commerce in the US was a negligible contributor to its growth last quarter and internationally, where Walmart is scaling up its e-commerce operations, it’s had trouble doing so. Founded in 2014, Jet has a team that knows how to scale up quickly – the business is already approaching $1bn in annual goods sold.

Jet’s differentiator is its ability to lower prices through a better understanding of shipping and fulfillment costs. That also aligns with a notable Walmart priority: the company plans to invest heavily in reducing its prices over the next few years to recapture what was once its edge in the offline retail market. Jet’s team may have limited ability to help Walmart on pricing its in-store goods; however, the target has the knowledge to enable Walmart to more effectively battle Amazon in terms of price.

Today’s transaction highlights the degree to which offline brands have embraced online technologies as an important avenue to engage with customers, rather than a secondary distribution channel. Until last year, large tech acquisitions by retail and consumer goods vendors were a rarity. No longer. Unilever’s entry into the shaving market via its pickup of Dollar Shave Club, recent deals by Nordstrom and Bed Bath & Beyond, and a string of mobile app purchases by athletic apparel giants Under Armour and adidas show that digital transformation isn’t limited to the IT department.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Dollar Shave Club: a rare unicorn indeed

by Brenon Daly

With a reported unicorn-sized exit, Dollar Shave Club has been able to pull off what few other high-profile e-commerce startups have done recently: actually deliver a return to its investors. The e-tailer, which raised more than $150m since its founding four years ago, sold to consumer products giant Unilever for $1bn, according to numerous press reports. Assuming that 10-digit price tag is correct, Dollar Shave Club investors stand to pocket a tidy return.

The same can’t be said for the backers of two other websites that frequently found themselves in the headlines for ‘disrupting’ the staid retail industry, but came up short when they sold earlier this year to the very brick-and-mortar companies they set about disrupting. Both Gilt Groupe (acquired by Hudsons Bay Company in January) and One Kings Lane (acquired by Bed Bath & Beyond in June) sold for less than the money they raised from VCs. Investors lavished about a quarter-billion dollars on both Gilt Group and One Kings Lane, or some $100m more than Dollar Shave Club took in.

The distressed sales of Gilt Group and One Kings Lane initially confirmed that some of the air appeared to be leaking out of the valuation bubble for many of Silicon Valley’s highest-valued startups. That shouldn’t come as a surprise. After all, a majority of the respondents to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster forecast last October that the unicorns that would exit in the coming year would do so at a lower valuation than they had commanded in their latest VC fundings.

MoFo Unicorn outlook

Content and data form foundation of Adobe’s M&A strategy

Contact: Scott Denne

At its annual marketing user conference, Adobe laid out a strategy to extend throughout and beyond marketing by touching on every part of the customer experience with content and data offerings. The company has accumulated the biggest and broadest suite of marketing software products among any of its enterprise software peers. However, it will take many years for marketing software to become a mature segment. For Adobe to maintain its position, it will need to continue to expand its offerings.

Despite the hyperbole about the level of technology spending among CMOs, marketing software remains in an early – though promising – stage. Spending continues to rise and the landscape is fragmented. It will likely remain so as new forms of media and mobile devices continue to sprout. And with them, new methods of customer engagement and increasingly fragmented audiences and data sets. The exits of enterprise software vendors such as Teradata, Hewlett Packard Enterprise and SDL provide Adobe and other remaining incumbents with an opportunity to gain market share and push into emerging corners of this category.

Adobe began its foray into digital marketing with acquisitions – first website analytics company Omniture (2009), and then website content management vendor Day Software (2010). Those two products currently sit at the core of Adobe’s marketing suite and much of the growth in its Marketing Cloud, which currently generates $1.4bn in trailing revenue, comes through the sale of them or cross-selling other offerings to customers that already use Adobe for analytics or content management.

As Adobe looks beyond marketing and toward becoming the data and content layer that powers the customer experience landscape, it could expand into areas such as e-commerce platforms, cross-channel attribution and customer data platforms. Subscribers to 451 Research’s Market Insight Service can access a full report on Adobe’s strategy, product portfolio, competitive positioning and potential targets in the marketing ecosystem.

What happened to Alphabet’s M&A bets?

Contact: Brenon Daly

As part of an effort to provide more strategic focus as well as financial transparency, Google reorganized and renamed itself Alphabet last October. In the half-year since that change, the company has lived up to the ‘alpha’ part of its new moniker, handily outperforming the Nasdaq, which is flat for the period. But when it comes to ‘bet,’ it hasn’t been placing nearly as many M&A wagers as it used to.

So far in 2016, the once-prolific buyer has announced just two acquisitions, according to 451 Research’s M&A KnowledgeBase. That’s down substantially from the average of six purchases that Google/Alphabet has announced during the same period in each of the years over the past half-decade. (Nor do we expect this year’s totals to be bumped up by Google buying Yahoo, as has been rumored. That pairing would roughly be the sporting world’s equivalent of the Golden State Warriors nabbing the Los Angeles Lakers.)

The ‘alpha’ part of Alphabet is, of course, the Google Internet business, which includes the money-minting search engine, YouTube, Android and other digital units. This division generates virtually all of the overall company’s revenue and is the primary reason why Alphabet is the second-most-valuable tech vendor in the world, with a market cap of over a half-trillion dollars. For more on the company’s progress in dominating the digital world, tune in on Thursday for its Q1 financial report and forecast.

Google/Alphabet M&A

Period Number of announced transactions
January 1-April 18, 2016 2
January 1-April 18, 2015 6
January 1-April 18, 2014 8
January 1-April 18, 2013 4
January 1-April 18, 2012 4
January 1-April 18, 2011 8

Source: 451 Research’s M&A KnowledgeBase

Locally grown is not satisfying enough for Alibaba’s palate

Contact: Mark Fontecchio

Alibaba is aggressively looking to expand its e-commerce empire beyond China, and is spending heavily to do so – its latest investment being $1bn for a majority stake in e-commerce vendor Lazada. The acquirer, which has mostly limited its purchases to China, is beginning to look abroad as the growth of its local revenue slows.

Yesterday’s reach for about two-thirds of Lazada was its first for another online retail business, according to 451 Research’s M&A KnowledgeBase. A deal of that size for online retail is rare – we count just a handful of other $1bn+ transactions in the past 15 years in that space – making Alibaba’s move that much more significant in its international push. Singapore-based Lazada also operates in Indonesia, Malaysia, the Philippines, Thailand and Vietnam.

The challenge for Alibaba will be transforming Lazada into an operation as efficient as its own. While Alibaba has 5x as many employees as Lazada, it generates 61x the sales. And it’s profitable. Lazada’s losses, on the other hand, have grown at a faster clip than its revenue (sales increased 80% to $191m in the first nine months of 2015, but its adjusted EBITDA losses more than doubled). The pickup of Lazada follows shortly behind its participation in a $500m funding round for India-based Snapdeal.

Lower than expected growth is driving Alibaba’s expansion outside its home country. Its revenue last year grew 27% to about $12.8bn, below the 33% growth rate in 2014 and much lower than in previous years. Wall Street has pounded Alibaba’s stock for repeatedly not meeting analysts’ revenue projections, sending shares down 16% from its opening day price in September 2014. Growth is increasingly difficult for Alibaba to find locally – for example, the company is setting up thousands of rural service centers to cater to areas with little or no Internet access. Thus, it is looking beyond its borders to find it.

Credit Suisse Securities advised Alibaba on its acquisition of Lazada, while Goldman Sachs banked Lazada.