Back in the day, eBay's (Nasdaq:EBAY) acquisition of PayPal was not exactly universally praised. Not only did eBay pay a steep price (about $1.5 billion), but there were questions about whether eBay was throwing good money after bad in the wake of the failure of the Billpoint acquisition, and whether this was an unneeded step away from eBay's core business of facilitating online auctions.
Tutorial: The Basics Of Mergers And Acquisitions
It is about nine years later now, and nobody seems to be second-guessing the deal. Rival operations from Citigroup (NYSE:C), Yahoo! (Nasdaq:YHOO) and Western Union (NYSE:WU) ultimately bowed out, and PayPal has more than held its own against Google (Nasdaq:GOOG). More to the point, PayPal contributed about one-quarter of eBay's $3 billion in gross profits in 2010 - not a bad return on that deal.
Looking to Recapture that Magic?
eBay has almost certainly not forgotten how PayPal changed their business, and Monday's acquisition of GSI Commerce (Nasdaq:GSIC) would seem to be following in that same vein. eBay announced that it will acquire this e-commerce facilitator for $2.4 billion in cash - offering $29.25 per share to GSIC shareholders.
This deal represents a 51% premium to Friday's closing price and roughly 23-times trailing EBITDA. Looking at forward multiples, it appears as though eBay is paying about 13- to 14-times forward EBITDA, which is roughly in line for what Oracle (Nasdaq:ORCL) paid for Art Technology a little while ago. eBay will be divesting part of GSIC, though, as it has elected to sell the licensed sports merchandise business and most of the consumer engagement operations back to the CEO in the form of a new holding company.
As part of the deal terms, eBay is also granting a "go shop" window to the company to seek a better deal. It is worth wondering whether go-shop opportunities may become a new trend in corporate M&A as a means of avoiding the latest fad in class-action nuisance suits - the accusation that companies are selling themselves at unfairly low prices. (For more, see M&A Competition Is Cutthroat For Acquirers.)
What eBay Might Be Thinking
Although eBay may forever be thought of as an online auction company, it really has been shaping itself more and more as a broader e-commerce enterprise. Plenty of companies conduct all of their online business (if not all of their business altogether) through so-called eBay Stores.
That would seem to fit quite well with GSI Commerce's core business - offering a complete suite of e-commerce services - from site design to marketing to customer service and fulfillment - to companies that wish to add an online sales presence. Where GSIC may change things up a bit for eBay, though, is in the scale of the customer base - GSIC boasts many large customers like Toys R Us, Polo Ralph Lauren (NYSE:RL) and Aeropostale (NYSE:ARO).
Competition Is Ramping Up
E-commerce is still growing faster than traditional retail and the competition is not letting up. Amazon (Nasdaq:AMZN), Google, Microsoft (Nasdaq:MSFT), IBM (NYSE:IBM) and Oracle are all already looking to do some (or all) of what the combined eBay-GSI Commerce can do. What's more, smaller private companies like Demandware, MarketLive, and Venda are likewise looking to gain share and grab their own piece of the pie.
By no means is this deal a competition-crusher for eBay, but it certainly does give scale, infrastructure and capital to a business that had done pretty well already on its own. It will be interesting to see how the competition reacts - Amazon will likely be unfazed, but a company like Oracle may find that a software-only approach that lacks the customer service and fulfillment capabilities is less appealing to smaller customers that lack a sizable back office infrastructure. (For more, see Cashing In On Corporate Restructuring.)
The Bottom Line
Although companies like Demandware show that there still is some vibrancy in smaller e-commerce names, investors are running a little low on options now. Companies like Digital River (Nasdaq:DRIV) are still out there, but a lot of the small- and mid-cap names have either grown up or sold out along the way. With that scarcity value in mind, eBay pretty much had to pay up to get GSI Commerce, but the company's experience with PayPal and the opportunities in the market for all-inclusive e-commerce solutions should give eBay shareholders some confidence in this deal. (For related reading, see PayPal Again The Standout At eBay.)
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