Amazon in Love: The Four-Year-Long Courtship of Zappos


Today, Zappos filed its S4 with the SEC and, as these things go, it’s pretty rife with interesting details. For example, reading the document, you can see that while net revenue for Zappos was $635 million last year, up 21 percent from 2007, its net income was just $10.8 million thanks to all those shoes and boots that consumers returned to the company — on Zappos’ own tab. That’s ten times what the company netted in 2007 but still a remarkably small figure, considering Amazon is acquiring the company for 10 million Amazon shares, or roughly $900 million at Amazon’s share price today.

It’s also interesting to learn just how much Tony Hsieh and Alfred Lin — Zappos’s CEO and CFO, respectively — stand to make off the sale of the company. TechCrunch’s guesstimate is that Hsieh will see at least $214 million, Lin will see at least $18 million, and that Venture Frogs, a $27 million seed-stage fund that Hsieh and Lin launched in the ‘90s and which backed Zappos, will see an additional $163 million. (What TechCrunch doesn’t say is that all of that money is likely to go to Lin and Hsieh, too. I’m pretty sure the pair were exclusively investing their own money at Venture Frogs, having made a mint as founding members of LinkExchange, a startup that sold to Microsoft for $250 million in 1998.)  

Almost more interesting to me, though, is the detailed material included in the filing about Amazon’s courtship of the company. It’s no Nora Roberts’ romance novel, but  you can see that Amazon has been aggressively flirting with Zappos since August 2005, when it first contacted the company about “potential business combinations or strategic commercial relationships” — conversations that didn’t go very far until this February, when Zappos evidently became very receptive to the attention. How intense was the figurative canoodling that followed?  You can see for yourself that the two companies met roughly 25 times between last December and July 17, when Amazon’s board unanimously approved the all-stock acquisition.

Here’s the timeline, per the filing:

Over the past several years, Amazon from time to time contacted Zappos concerning potential business combinations or strategic or commercial relationships between Amazon and Zappos, including a meeting in Las Vegas, Nevada on August 18, 2005 with Jeff Bezos, Amazon’s Chief Executive Officer, Jeff Blackburn, Amazon’s Vice President of Business Development at that time, Russ Grandinetti, Amazon’s Vice President of Apparel and Sporting Goods at that time, Mr. Hsieh, Mr. Lin, who was also Managing Member of Venture Frogs, LLC at that time, and Michael Moritz, a Zappos Board member and a General Partner of Sequoia Capital, Zappos’ largest outside shareholder. However, these discussions did not lead to negotiations or a definitive agreement.

On March 3, 2008, Peter Krawiec, Amazon’s Vice President of Corporate Development, was introduced to Mr. Lin, who had since become Zappos’ Chairman, Chief Operating Officer and Chief Financial Officer, at a dinner function in Scottsdale, Arizona and they briefly discussed whether Zappos would consider a business combination or strategic partnership with Amazon.

On December 1, 2008, Mr. Blackburn, who had since become Amazon’s Senior Vice President of Business and Corporate Development, and Mr. Krawiec met Mr. Lin in Las Vegas, Nevada, to discuss opportunities for the companies to work together, and the parties agreed to continue their discussion in the first quarter of 2009.

On February 3, 2009, representatives of Morgan Stanley & Co. Incorporated (“Morgan Stanley”), met with Mr. Blackburn and Mr. Krawiec to discuss the environment for mergers and acquisitions among technology companies and Amazon’s strategic priorities. Among other topics, Amazon indicated its interest in evaluating a possible business combination or strategic relationship with Zappos, as Amazon was contemplating various initiatives in the footwear and apparel categories.

During the month of February 2009, representatives of Morgan Stanley held a number of meetings and conference calls jointly and individually with Mr. Lin and Mr. Moritz to discuss various benefits of a possible business combination or strategic relationship with Zappos and Amazon.

On February 23, 2009, Mr. Moritz called Mr. Blackburn and Mr. Krawiec to discuss a potential business combination of Amazon and Zappos and Mr. Moritz’s history of working with the Zappos management team.

In early March 2009, representatives of Morgan Stanley and Mr. Lin had several meetings to discuss Zappos’ business performance, financial and operating metrics and growth trends, the current economic environment in the capital markets and the technology mergers and acquisitions market and a variety of strategic alternatives.

On March 19, 2009, Amazon and Zappos executed a non-disclosure agreement to facilitate Amazon’s due diligence review in connection with a possible business combination with Amazon and Zappos, and the parties began to exchange non-public information on a confidential basis.

On March 31, 2009, Mr. Lin and representatives of Morgan Stanley held a conference call to discuss some of Zappos’ longer term strategic goals.

In early April 2009, Amazon had a number of conference calls with representatives of Zappos and Morgan Stanley to conduct a financial review of Zappos.

On April 3, 2009, representatives of Morgan Stanley, Mr. Hsieh, Mr. Lin and Mr. Moritz had a call to discuss Zappos’ recent financial performance and eCommerce trends.

On April 8, 2009, Zappos formally engaged Morgan Stanley as financial advisor in connection with a possible business combination or strategic relationship.

On April 14, 2009, a representative from Lazard Freres & Co. (“Lazard”) met with Mr. Blackburn and Mr. Krawiec at Amazon’s headquarters in Seattle, Washington, to discuss, among other things, a possible business combination or strategic relationship involving Zappos.

On April 15, 2009, Mr. Blackburn and Mr. Krawiec, along with Dan Jedda, Amazon’s Director of Business Development Finance, met with Mr. Lin and representatives of Morgan Stanley in Menlo Park, California, to discuss a possible business combination of Amazon and Zappos. In addition, Mr. Lin and representatives of Morgan Stanley presented a review of certain long term financial projections of Zappos and its strategic vision.

On April 16, 2009, the Zappos Board met in Menlo Park, California and discussed, among other things, a possible business combination with Amazon and Zappos.

On April 22, 2009, representatives of Morgan Stanley, Mr. Hsieh and Mr. Lin had a conference call to discuss the merits of a possible business combination and possible next steps to continue discussions with Amazon.

On April 30, 2009, Mr. Bezos, Jeff Wilke, Amazon’s Senior Vice President of North American Retail, Tom Szkutak, Amazon’s Senior Vice President and Chief Financial Officer, and Mr. Krawiec met with Mr. Hsieh, Fred Mossler, a merchandizing executive of Zappos who has the formal title of “No Title”, and Mr. Lin at Amazon’s headquarters in Seattle, Washington. During the meeting, the parties discussed Zappos’ history, goals, vision and culture and a possible business combination.

During May 2009, representatives of Zappos, Morgan Stanley, Amazon and Lazard discussed the feasibility and possible terms of a business combination, including discussions regarding the form and amount of consideration. Zappos also provided additional diligence materials.

On May 4, 2009, Mr. Krawiec and Mr. Lin had a telephone call in which Mr. Krawiec proposed possible terms of an all-cash acquisition of Zappos by Amazon, and Mr. Lin inquired whether Amazon would consider an all-stock transaction.

On May 5, 2009, a representative from Morgan Stanley met with Mr. Moritz to provide an update on the capital markets and the market for initial public offerings, as well as an update on the discussions between Amazon and Zappos.

On May 13, 2009, Amazon engaged Lazard as a financial advisor in connection with a possible transaction with Zappos.

On May 22, 2009, Mr. Lin met with Morgan Stanley to discuss valuation perspectives regarding Amazon’s proposed transaction terms and other strategic alternatives and scenarios, including debt financing, private equity financing and an initial public offering.

On May 22, 2009, a representative from Morgan Stanley called Mr. Krawiec and described a counter-proposal from Zappos involving an all-stock acquisition of Zappos by Amazon.

On May 27, 2009, Mr. Blackburn and Mr. Krawiec called Mr. Moritz and discussed the all-stock counter-proposal further.

On May 28, 2009, Amazon’s management made a presentation to the Amazon Board of Directors (the “Amazon Board”) relating to a possible business combination with Zappos and discussed preliminary terms, valuation ranges, possible synergies and other benefits.

On June 1, 2009, Mr. Lin met with Mr. Krawiec in Las Vegas, Nevada, to discuss terms relating to a possible business combination in which the consideration would be Amazon common stock. Mr. Krawiec delivered a letter regarding exclusivity between the parties and also non-binding discussion points relating to a proposed merger (the “Exclusivity Letter”), which included a purchase price proposal. Mr. Krawiec also delivered a letter from Mr. Bezos addressed to Mr. Hsieh, discussing Amazon’s interest in pursuing a merger with Zappos.

On June 2, 2009 the Zappos Board discussed Amazon’s June 1, 2009 proposal.

Between June 1 and June 8, 2009, Mr. Krawiec and Mr. Lin, along with representatives from Amazon, Zappos, Gibson, Dunn & Crutcher LLP, Amazon’s outside legal counsel (“Gibson Dunn”), Fenwick & West LLP, Zappos’ outside legal counsel (“Fenwick & West”), Morgan Stanley and Lazard negotiated the Exclusivity Letter and proposed terms of a merger in which the consideration would be Amazon common stock, including a purchase price proposal. Amazon and Zappos signed the Exclusivity Letter on June 8 and June 9, 2009, respectively.

From mid-June through July 2009, representatives of Amazon, Lazard, Gibson Dunn and PricewaterhouseCoopers LLP, Amazon’s tax advisors, conducted business, operational, financial, legal, accounting and tax due diligence of Zappos and held numerous discussions with representative of Zappos, Morgan Stanley, Fenwick & West and PricewaterhouseCoopers LLP, Zappos’ auditors and tax advisors. During this time period, representatives of Amazon, Zappos, Gibson Dunn and Fenwick & West also exchanged drafts of and discussed proposed terms of the Merger Agreement, voting agreement and ancillary documents.

On June 17, 2009, representatives of Amazon, Lazard and Morgan Stanley attended management presentations by representatives of Zappos at the offices of Zappos in Henderson, Nevada which included a summary of Zappos’ business strategy, historical and projected financial performance, technology, customer service, fulfillment operations, customer acquisition methods, marketing, merchandising, buying, culture, recruiting, human resource function, and future plans, as well as follow-up questions relating to Amazon’s due diligence process.

On June 24, 2009 and June 25, 2009, representatives of Amazon, Zappos and Morgan Stanley attended fulfillment center operations and fulfillment technology due diligence meetings in Shepherdsville, Kentucky.

On June 29 and 30, 2009, representatives of Amazon, Zappos, Gibson Dunn, Fenwick & West, Lazard and Morgan Stanley met in San Francisco, California to further discuss the proposed terms of the Merger Agreement.

On June 30, July 1 and July 2, 2009, representatives of Amazon, Lazard and Morgan Stanley attended management presentations by Zappos on the topics presented on June 17 and Zappos management answered follow-up questions relating to the June 17, 24 and 25 management presentations and Amazon’s due diligence process.

On July 10, 2009, Mr. Bezos, Mr. Krawiec, Mr. Hsieh, Mr. Lin, and Mr. Mossler met in Las Vegas, Nevada, to discuss the proposed Merger and future opportunities for Zappos following the Merger, as well as ideas, messaging and plans for communications to customers, employees, partners and investors.

On July 17, 2009, the Amazon Board discussed, among other things, the merits of the Merger, the results of due diligence performed on Zappos, the advice from its legal and financial advisors and the terms of the Merger Agreement, and unanimously adopted resolutions approving and declaring advisable the Merger, the Merger Agreement and the transactions contemplated thereby.