Diapers more valuable than shoes at Amazon

Contact: Jarrett Streebin

When Amazon.com bought Zappos.com last year, the online shoe retailer’s CEO was reluctant to sell. CEO Tony Hsieh said he had dreams of taking Zappos to $1bn in revenue for 2010 and an eventual IPO. Caught between 2009’s tumultuous markets and nervous investors, he was forced to sell. Judging by the multiples on Amazon’s recent purchase of Quidsi (owner of Diapers.com and Soap.com), Hsieh had good reason to not want to sell.

The two acquisitions are similar in that Amazon already sold both shoes and diapers, but opted to pay hundreds of millions of dollars for specialty online retailers. Yet if we look at the two transactions, we can’t help but notice that Amazon paid a substantially richer revenue multiple for Quidsi than it paid for Zappos last year. Based on revenue projections of $300m for this year, Quidsi was bought at 1.8 times sales while Zappos.com fetched only 1.3x its 2008 revenue. Given that the rate of growth was about 20% at that time, an estimated revenue of $762m for 2009 gives Zappos.com a multiple of 1.1x sales.

And that isn’t even the biggest difference in the deals. At the time of its acquisition, Zappos had 11.5 million customers. At a price of $847m, this is roughly $74 per customer. On the other hand, between Diapers.com and Soap.com, Quidsi had one million customers, giving it a cost per customer of $545, nearly eight times the price per customer for Zappos customers.

Based on the 1.8x multiple Amazon paid for Quidsi, Zappos would have gone for $1.37bn, nearly $500m more than the $847 it fetched. (And that leaves out any valuation based on the substantial difference in price per customer.) So at least on a comparative basis, we would certainly understand why Hsieh and the rest of Zappos might have a case of seller’s remorse.

Posted in M&A