Saturday, August 02, 2008

Should Amazon and eBay Merge?

I was musing about this idea over coffee this morning and came to the conclusion that there were more reasons for eBay and Amaqzon to merge than to stay separate. Now, before you investors, eBay execs and Amazon execs. start picking this apart, let's at least keep an open mind until you've read the entire post.


First, let's look at some of the main reasons not to merge:
  • Amazon is growing fine on its own - They really don't need eBay; they have a plan to rule ecommerce and they are working hard to accomplish that goal -- it just may take awhile.
  • Regulatory issues - If the top two online marketplaces joined forces, there might be some issues with the reduction in competition, but I think a merger would pass muster fairly easy.
  • Corporate Cultures - You cannot find two more different corporate cultures and it would certainly be very difficult to mesh them, but not impossible. To be honest Amazon could use some lightening up and eBay could use some tightening up. The employees of both companies might actually welcome a little dose of culture from the other, but an all-Amazon culture would not work nor would an all-eBay culture.
  • Amazon management would dominate - With Meg, Bill, Rajiv and many others no longer at eBay, the Amazon management team would dominate. I can't see many of the current eBay execs making the transition. So why would you agree to a deal that puts you out of a job? Maybe because there would be real upside for the share price again.
  • Amazon is not enamored with the community aspects of eBay - Amazon is all about control and we've seen what exerting control has done to eBay's marketplace business. The two seller communities are much different, but this is not something that can't be overcome.
  • Amazon has no need for Skype - Well, eBay has no need for Skype either so that makes them even. This could be solved rather easily by selling Skype to a large Telco, Microsoft, Yahoo or Google.

Okay, I'm sure there are more reasons not to merge, but those were the first ones that came to mind. The challenges would be difficult but not insurmountable.

Why would investors want a merger?

  • Market Cap - both companies have almost identical market caps (Amazon $32.26 billion and eBay $31.97 billion), making an outright acquisition by one or the other near impossible.
  • Cash in the Bank - The combined companies would have $6.38 billion in cash and even more (maybe $4 billion more) after the sale of Skype and less than a $1 billion in debt.
  • $80 billion in GMV/Sales in 2008 - $20 billion in sales from Amazon and over $60 billion in GMV from eBay.
  • PayPal and Amazon Payments - Combine One-Click checkout and A-to-Z Guarantee with PayPal's stored balance and userbase. That would be a pretty powerful combination.
  • Margin Control - Overall, margins would compress some, but Amazon shareholders would love the increase in margins and eBay shareholders would love the faster growth.
  • Undisputed Global Leader - The combined company would instantly be the undisputed worldwide leader in ecommerce.
  • Ecommerce is Slowing - Make hay while the sun shines.

Why would Amazon want to merge?

  • Speed up their plan - Amazon is very methodical when launching new categories and countries. A merger with eBay instantly opens up every category and an additional 20+ countries.
  • Improve Margins - Adding eBay's high margin businesses to Amazon's very efficient operation, would give them ultimate pricing power for their retail business.
  • eBay Motors - While the used-auto business is facing some challenges, eBay Motors is still a very valuable property.
  • StubHub - Amazon gets into the Ticket business with a high margin operation.
  • Classifieds - Amazon gets into the Classifieds business.
  • Auctions - Many of you may disagree with me, but Auctions are not dead, eBay management has just put the governor on them. IMO, auctions need to be separate from fixed price and eBay is still the worldwide leader in auctions. The combined companies would alleviate some of the pressure to make the auction business a high-growth business, instead it would become a slower growth, but high-margin business that still has some life in it.
  • PayPal - Combining PayPal and Amazon payments would create an unbeatable combination.
  • eBay Stores - I believe that eBay stores are an under appreciated asset for eBay but could thrive under Amazon management. Half a million store owners would welcome the merger.

Why would eBay want to merge? (Fewer reasons than Amazon)

  • The Marketplace business is unwinding - A combined company, takes the pressure off fixing the Marketplace problems today and allows management to go back to eBay Classic. Amazon is the fixed price leader and they know what they are doing in retail. eBay knows auctions -- ultimately a pretty powerful combination.
  • PayPal - Instantly get access to 80 million Amazon customers and head-off any real competition from Amazon payments.
  • Growth - There will be upside to the share price once again.
  • Merge or get acquired - If eBay continues down the path they are on, they will have even less leverage in a deal a year from now and will become an acquisition target of Google or Microsoft. At least with an Amazon merger, they will have more say in the outcome.

I struggled a little to find reasons why eBay would merge with Amazon, but if they continue to struggle, their options will get much worse. Amazon doesn't need eBay, but eBay may need Amazon.

I'm sure there are many additional pros and cons that you can come up with and I would love to hear your 12%, so please use the comment section to let me know what you think. BTW, the likelihood of such a deal is really small but stranger things have happened.

Just my 12%

20 comments:

ms.pat said...

Randy you answered your question in the opening paragraph:

"Amazon is growing fine on its own - They really don't need eBay; they have a plan to rule ecommerce and they are working hard to accomplish that goal -- it just may take awhile. "

Why stick your nose out and ask for trouble...and Ebay right now is big trouble.

www.ACEOart.net

Anonymous said...

Should Geico and Enron Merge?

Scott said...

Interesting thoughts Randy... somewhat along the lines of our Twitter conversation when you were at the Amazon conference in Seattle...

I really don't think it all that far fetched... wish I had written about it last week after we chatted...

nadine said...

What's the upside for Amazon? They don't need to buy growth. They would gain vast headaches in exchange for what? Paypal? Amazon doesn't need Ebay Marketplace, they are already eating its lunch, bite by bite.

At some price the deal may become attractive but I doubt it's this year & today's price. Maybe next year.

Lisa Suttora said...

I agree with you Randy, I don't think auctions are dead at all. And I believe that an eBay platform that embraced and enhanced the auction format would very successful.

Fixed price commodity products and unique one of a kind products can't be marketed to customers using the same methods. It doesn't work offline and it doesn't work online.

Imagine Macy's with a antique store in the middle of it. :-)

Regarding stores - if eBay store owners had the freedom to really let loose and build dynamic stores with the ability to market those stores using a variety of ecommerce and marketing tools - they would be a major presence on the web.

There's so much 'undiscovered gold' in eBay stores inventory that no one ever sees...

BTW, love your blog!

Ansgar-John said...

Great post. I have a secondhand store and don't feel welcome on eBay anymore, a merger could maybe enable the two to focus on new/commodities on one hand and unique, antique, collectible on the other.

Too bad companies like Bargainland got kicked off eBay.

PS: Don't mix secondhand and new offline ? What about: Anthropologie ?

Randy Smythe said...

Nadine, Amazon could just get to where they want faster.

They don't seem to be in any hurry and as I said this is not likely to happen.

It is fun to consider.

Anonymous, not quite sure where you were going with that Geico and Enron comment.

Lisa, auctions are not going to be a high growth business but if you keep throwing Fixed Price items in with auctions they don't have a chance.

ms.pat said...

Amazon wants nothing to do with auctions. They had em years ago. I sold occasionally on their auction section.

I think I could see somebody like microsoft take over ebay. Microsoft tried to get into the auction business years ago by combining 3 auction sites in one...I forget what they called it. It flopped mostly because Ebay was in its heyday and microsoft never really advertised.

Randy Smythe said...

Pat, they don't want auctions but they do like money and there is still plenty of money to be made in auctions.

If they had the increased revenue from eBay, they would be unstopable.

eBay is still a much more profitable business than Amazon.

Boon said...

This would be terrible for the consumer. A lot of the innovations both companies are doing are the result of the competition.

Randy Smythe said...

Boon,

How would this be bad for the consumer. Amazon is all about the consumer.

They want to be the low price, premium service retailer. This would improve the buyer experience but would impact othe online retailers.

Matt with BumbleZine said...

This pretty much sums it up Randy: "....Amazon doesn't need eBay, but eBay may need Amazon....." Unless eBay learns quickly (humility required first), it will be true before long.

Anonymous said...

Randy,

You miss Boon's point. You have too much blind faith in Amazon being customer focused.

There is a famous saying that one lawyer in a town will starve to death -- but add a second lawyer and both will have more than enough business.

The same is true here. Amazon is "pushed" by eBay and eBay by Amazon. Consumer's benefit greatly. That's what competition does. Having a singular focus on consumers will not guarantee execution (witness the fall of the Soviet Union or China's turn to democracy/capitalism). Competition creates a positive environment.

You also give very loose strategic goals, but zero financial goals. Right now, any investor could buy BOTH Amazon and eBay and get the benefits you point out.

Why would they need to support a merger? A merger would need to show either faster sales growth than pre-merger OR significant cost cutting post-merger.

Except for the potential of adding PayPal to Amazon, I see no revenue gains evident. Amazon has a much greater likely return with their successful own introduction of their new payments platform for much less risk. Both companies already run very lean and have huge margins on the 3p sales, so there is not much cost savings that I can see.

Finally, your use of GMV as a key metric in the merger is misguided.

Managing a $20b gmv company when YOU own $12-15b in the gmv, is VERY different than managing a $7b company when you don't own any of the GMV. You can't blend the two models by simply pointing to a shared GMV metric.

This means the risks on culture and organization is far, far more than you might imply.

Bad deal all around.

Now, MS buying eBay -- there is a far more interesting case to be made for that. I think eBay claims it does more searches in a day than Google? You see where I'm going with this. The introduction of MS Live Cash-back makes this very intriguing!

Brian

Randy Smythe said...

Brian, you make some valid points but miss the point on several.

In regards to Boons point about the consumer. I would compare what Amazon is doing online to what Walmart did in the real world.

The consumer benefits from WalMart just as they would from a larger Amazon.

As for the financial goals, with a merger. I would contend a combined company would be able to cut costs and grow faster then either company is growing now. Amazon is heading there anyway;a merger getsthem there faster. eBay is heading the other way a Merger saves them.

As for MS buying eBay, that is the more likely scenario than an Amazon/eBay merger, but then you would have two companies that are clueless. At least Amazon knows what they are doing.

Anonymous said...

I gotta chuckle out of your "clueless" comment. If God would only bless me to to be so clueless as either MS or eBay have been/are! I could use with a lot more clue-lessness and a lot less know-it-all-ness. Reminds me of the George Burns quote: "“Too bad all the people who know how to run the country are busy driving taxi cabs and cutting hair”. Randy -- it is too bad you and I are too busy posting on blogs to run Amazon, eBay or MS!

I would appreciate it if you could expound on where you think the fuel for faster growth from a merger hails from? Neither eBay nor Amazon has a problem getting visitors to their sites. Both are the undisputed places to get lowest price items online. Both have well-known brands. True, Amazon has a greater "trust" factor, but eBay's trying to re-build their's with DSRs. Neither has added a great number of new buyers to their rosters. There aren't enough untapped consumers left to go after. Repeat buyers is where it is at and Amazon, to its credit already has Prime; and excuse me for saying, MyStoreRewards is going to launch with Project Echo in November. Thus, both are already moving to increase repeat sales. Where would the fuel for growth come from? I contend the overlap on the customer base is probably 90%+. I know almost no one who has only bought on one site, not the other.

As for your comment about eBay being saved by the merger -- again, I'm reminded of a great quote about mergers. It goes something like this:

Your grass is green. Our grass is brown. How about we merge with you and turn your grass brown too?

There really needs to be some foundation for a lift in share or strategic position and I can't see it. It's like eBay buying Skype. It was big, it was on the internet, and it was there. Other than that, no real strategic benefits.

PS: Wal-mart has Target to worry about.

This is fun for a Sunday morning diversion. Beats the heck out of debating Obama vs. McCain.

Brian

Tony P. said...

The way I read this, it isn't so much about concrete Financial Reasons that would cause both parties to beat a hasty path towards a meeting place to form an alliance, it is more about thinking how it may be advantageous to both.

True, if the financial outlook of such a merger was put to paper, it may very well look like Chit. Hell, let me play devil's advocate... Bezos would have to be tranquilized just to get him to listen to this. He doesn't want anything to do with auctions, itself, let alone ebay's version(s) of them.

This is a pipe dream. It simply expresses the reasons that such a merger could possibly be viewed as beneficial to both. There are only two reasons - one Main Reason for each entity - the other reasons/benefits are simply conjecture, and possible wishful thinking.

The 'wishful thinking' isn't necessarily just an excercise on Randy's part, it would also be part of ebay/amazon thinking, if they are driven enough by their own Main Reason for the merger. If they want IT bad enough, they'll paint a rosey financial picture.

Amazon's Reason: immediate increase into domestic and international market penetration of ecommerce and payments.

Ebay's reason: to save their dumb, flailing-wildly ass from an ever-increasing downward spiral of denial and destruction.



Although I don't put a great deal of stock [pun intended] into what Jim (bear sterns is AOK) Cramer has to say, I'd love to read his write-up on a merger of Amzn & Ebay, both pro and con. He's already tied Amazon and Walmart as the top dogs of American commerce. I wonder what he'd think about having a champion breed with a mangy mongrel?

Randy Smythe said...

Tony, thanks for understanding the reason for the post.

I was not making an M&A case for a merger, I was doing what I do, bringing up the idea and throwing my 12% on it.

Yes, there was much wishful thinking because I would rather have the Amazon management team running eBay rather than the eBay team.

The combined companies would absolutely dominate ecommerce and that is intriguing to me so I raised the idea.

I do think there is enough meat on this bone though for the parties involved to consider the concept and see if there actual verifyable benefits for such a marriage.

I also appreciate Brian raising the concerns he had with the idea. I learned a long time ago to be open to many viewpoints. Hell, I;ve even been called an idiot for some of my hairbrainded ideas.

I think the back-and-forth is fun.

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