‘Buy now’

by Brenon Daly

As holiday-sated workers troop back to the office, they are expected to go through the annual ritual of logging onto their favorite online shopping sites and, collectively, throwing a few billion dollars into those virtual cash registers. The unofficial holiday of Cyber Monday pits retailers of all stripes against each other in an annual test of who can get online shoppers to click the ‘buy’ button.

For retailers not named Amazon, drawing in more of those digital dollars has meant making ever-larger M&A bets. This year has already seen two of the four largest acquisitions of online retailers since the internet bubble burst, according to 451 Research’s M&A KnowledgeBase. The big prints have pushed this year’s spending on internet retailers to a record level, with the value of 2018 deals roughly matching the previous five years combined.

Looking at the blockbuster online retail transactions in 2018, however, we’re struck by the disconnect between the most-basic tenant of any market: supply and demand. Specifically, there’s a notable divergence between how an acquirer plans to use the target company to bolster its e-commerce site (supply), compared with what customers actually want from an e-commerce site (demand). One of our recent surveys of hundreds of online shoppers suggests that companies might do well to focus on optimization, rather than acquisition.

Consider the rationale for the two largest online retailing deals in 2018, which, admittedly, skewed overall spending in the sector compared with previous years. Walmart spent $16bn last summer for a majority stake in India-based e-commerce giant Flipkart, as part of a geographic expansion by the world’s largest retailer. A few months earlier, Swiss jewelry retailer Richemont handed over $3bn to expand into the clothing market as it purchased YOOX Net-A-Porter.

Broadly speaking, both of those transactions were driven by the buyer’s desire to expand into new markets. But merely offering more stuff – whether new products or new geographies – doesn’t necessarily lead to more sales. Without streamlining the acquired property, offerings turn into clutter. That’s an inconvenient fact that undermines much of the rationale for big e-commerce purchases like this year’s pair of billion-dollar deals.

As clearly shown in a recent survey by 451 Research’s Voice of the Connected User Landscape (VoCUL), more online stuff can slow sales, and send would-be buyers to other sites. In fact, three of the four top attributes that respondents to the VoCUL survey said they valued the most when shopping online had to do with being able to find and purchase things quickly. Would-be acquirers in the online retailing market should remember that when it comes to commerce, convenience is key.

Retail’s plodding path

Contact:  Scott Denne

It’s hard to find an industry that’s more threatened by emerging technology than retail. In addition to dangers from Amazon and a bevy of younger online retailers, stores are forced to adjust to changes in consumer behavior that impact everything from marketing to inventory management and logistics. Despite all that, the exit environment for startups selling retail technologies is narrowing as retailers and consumer goods companies generally show less inclination to invest in new technology than other industries.

There are exceptions. Take L’Oreal’s recent purchase of augmented reality vendor ModiFace. In reaching for the virtual makeover vendor with 70 engineers specializing in augmented reality and machine learning, L’Oreal hopes to expand new channels for customer engagement – a path it started down in 2014 with the launch of its augmented reality mobile app, Makeup Genius. Still, our surveys of retail technologists, along with acquisition data from 451 Research’s M&A KnowledgeBase, suggest that L’Oreal will be an outlier.

Retailers and related consumer products providers are less likely to be planning to adopt augmented or virtual reality technology in the next 24 months. In 451 Research’s VoCUL: Corporate Mobility and Digital Transformation survey, 24% of retail respondents told us their organization planned to use such technologies, compared with 29% of other respondents. Retail indexed lower in most other categories of emerging technologies as well, including artificial intelligence, where 35% of retail respondents planned to adopt, compared with 47% across all other verticals.

The reticence to invest in newer technologies translates into a decline in dealmaking. According to the M&A KnowledgeBase, acquisitions of retail technology firms – anything from e-commerce businesses to supply-chain software firms that specialize in serving retailers – declined 30% in 2017, with just 232 transactions.

After a few years of expanding, valuations among this group are coming down a bit. For the first time since 2012, we didn’t track a single multiple at or above 8x trailing revenue in 2017 for businesses with more than $2m in annual revenue. The decline in the highest multiples comes as overall deal value for the category rose to $18bn, from $16.8bn a year earlier, as buyers – both retailers and the tech vendors that service them – sought out more mature businesses at higher prices, but lower multiples, than startups dabbling in the latest technology.

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

CommerceHub in sellers’ market

Contact: Scott Denne

A pair of private equity (PE) firms has taken CommerceHub off the public markets in a $1.1bn acquisition. The deal carries a scorching multiple that punctuates the value of e-commerce software as retailers struggle to make digital engagement a centerpiece of their business.

GTCR and Sycamore Partners’ joint purchase of CommerceHub values the firm at 10x trailing revenue, or 32x EBITDA – atypical multiples for an e-commerce software provider with the target’s growth. With that valuation, CommerceHub finds itself in the same neighborhood as Demandware and hybris, which each fetched about 11x revenue in their respective sales to Salesforce and SAP.

Yet CommerceHub’s revenue expanded by just 11% last year, compared with Demandware and hybris, which both posted topline growth in the 50% neighborhood leading up to their exits. Ariba offers a more accurate, if aging, comp for CommerceHub – both vendors provide back-end commerce services, such as integration between retailers and suppliers, whereas Demandware and hybris build customer-facing software. CommerceHub is fetching a multiple that’s a full turn above Ariba’s 2012 sale, despite the latter company having double the growth rate and being triple the size of the former.

In part, today’s multiple reflects higher prices being paid by buyout shops as their investments in tech M&A rise. According to 451 Research’s M&A KnowledgeBase, the median multiple paid by a PE acquirer last year rose to 3x, up from 2.5x a year earlier. Moreover, that median has hovered above 2.5x every year since 2014. In the preceding decade, it never once hit that level, and in only three years did the median reach 2x.

All that’s not to say nothing but a flood of PE money drove up CommerceHub’s price. Digital commerce technology is evolving into a core element of customer engagement and retailers need timely, accurate product information, which CommerceHub facilitates, to integrate into their customer-facing marketing and commerce software systems. According to 451 Research’s VoCUL Quarterly Advisory Report: Digital Transformation Leaders and Laggards, digital commerce and web experience management are the two most common areas of investment for enterprises, as 27% of enterprises told us they plan to deploy or upgrade those technologies in late 2017 and early 2018.

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

Williams-Sonoma orders augmented reality

Contact: Scott Denne

Retailers have inked a handful of deals in an effort to fend off competition from Amazon and adapt to a blossoming era of mobile-enabled shopping. Yet few buyers have reached for companies with advanced technology, instead opting to bolt on digital media, e-commerce and services businesses. Williams-Sonoma’s $112m pickup of Outward counters that trend and shows that retailers could become true tech buyers as digital commerce entails more than stitching on a website.

With its acquisition of Outward, Williams-Sonoma, a maker of upscale household wares and (through its Pottery Barn subsidiary) furniture, obtains technology that enables 3-D renderings of its inventory for use across multiple digital platforms, including a forthcoming augmented reality (AR) app that helps customers visualize furniture purchases in their own homes.

It was that mobile capability that drove Williams-Sonoma to pay $112m for a company that raised just $11.5m in venture capital. The buyer believes that more immersive capabilities on its mobile website and app have already led to sales and will continue to do so in the future. According to a study done by 451 Research’s VoCUL in the first quarter, 35% of consumers research a purchase on their smartphone at least once a week before going to a store.

For other retailers looking to follow Williams-Sonoma, there are a handful of assets remaining. Although furniture shopping is a niche application of AR, such startups have gotten their fair share of venture capital, having raised a total of $34.8m across six vendors, including Marxent, Modsy and Hutch, according to 451 Research’s M&A KnowledgeBase Premium. Today’s deal, along with Amazon’s purchase of Body Labs and Bed & Beyond’s acquisition of Decorist, could spark retailers to buy more ecommerce technologies.

Still, if past is precedent, retailers aren’t likely to rush into acquiring companies like Outward, which has filed for eight patents related it its imaging technology and was built by a team of Qualcomm veterans. Instead, they’re likely to continue to snag their e-commerce counterparts as they’ve done so far this year. According to the M&A KnowledgeBase, 11 of the 26 deals by brick-and-mortar stores in 2017 have been acquisitions of online retailers.

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

Retailers go shopping online 

Contact: Scott Denne

It’s been a tough year for retail. More than a dozen retailers – the latest being Toys R Us – have filed for bankruptcy, while others – JC Penney and Macy’s, for example – have grappled with lower-than-expected sales and store closings. As they face the acute threat from online sellers, Amazon in particular, they have adjusted their acquisition strategies to be more ambitious in scale, yet narrower in scope.

According to 451 Research’s M&A KnowledgeBase, spending on tech M&A by retailers spiked this year and last, with each cresting above $4bn in spending, whereas each of the four years prior to that, total spending fell safely below $1bn. (Two deals – Walmart’s $3.3bn purchase of Jet.com and PetSmart’s $3.4bn reach for Chewy – account for most of that boost, yet even excluding those transactions, spending by retailers in 2016 and 2017 sits slightly higher than normal.)

Aside from the increase in spending, retailers have executed a shift in M&A strategy. Where they had once been inclined to pick up companies outside their core competency, buying websites, logistics or gaming companies, they’re now more likely to snag their online counterparts, as Signet Jewelers recently did – amid declining in-store sales – with its $328m acquisition of R2Net. As their customers have done more of their shopping online, retailers have done the same. This year and last, retailers printed more deals for e-commerce vendors than all other categories combined, a contrast to their earlier buying habits.

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

Grand Junction buy shows that Target’s digital strategy goes through its stores

Contact: Scott Denne

While Walmart is attacking Amazon by air with its Jet.com asset, Target is planning a ground assault. Its acquisition of Grand Junction marks Target’s reentry into the tech M&A market after a nearly three-year absence. And although the price is likely modest – the target only has a dozen or so employees – it aligns with the big box retailer’s expansion strategy.

The deal adds to the list of steps Target is taking to adapt its business to the growth in digital shopping by leveraging its physical assets to improve fulfillment (both in cost and quality of service). The company has worked with Grand Junction on its first experiment with running same-day delivery out of one of its Manhattan locations. It’s also opening a new distribution facility designed to test supply chain and logistical innovations, integrating its existing stores with its digital supply chain and launching 100 new small-format locations.

Even its previous tech acquisition, PoweredAnalytics, expanded its physical capabilities by analyzing data to adjust the in-store experience. Its focus on adapting its physical assets to digital shoppers makes Target’s M&A strategy unique. Walmart, for example, has gone after established e-commerce businesses, starting with Jet.com, to build a niche in online retail in areas like fashion where Amazon hasn’t yet made its mark. Other traditional retailers and consumer goods vendors have bolted on firms that bring them into new markets, such as Barnes & Noble Education’s recent reach for student media provider Student Brands or Whirlpool’s pickup of recipe site Yummly.

Although retailers and consumer goods companies still make up just a fraction of overall tech M&A, their activity has grown as they encounter an accelerating pace of store closures and bankruptcies as shopping shifts to online channels. According to 451 Research’s M&A KnowledgeBase, those buyers have spent $4.7bn across 22 tech transactions in 2017, the same pace as last year’s record level of dealmaking.

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

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.