Lots of people are saying that Amazon (AMZN) CEO Jeff Bezos got a great deal when the online e-tailer purchased Tony Hsieh's online shoe company Zappos.com in an $847 million cash and stock deal announced last week. But was it really a great deal? That's very hard to tell from the analysis of comparable transactions listed by Zappos' i-bank, Morgan Stanley, taken from an S4 filed with the Securities and Exchange Commission on July 27.

The comparable deals include the acquisition of Gmarket by eBay in April 2009 for $1.2 billion; Bill Me Later, also acquired by eBay in October 2008 for $945 million; the purchase of Greenfield Online Inc., acquired by Microsoft in October 2008 for $524 million; Bebo, acquired by Time Warner in March 2008 for $845 million; CNET Networks, acquired by CBS Corp. in May 2008 for $1.8 billion, and Audible, which Amazon bought in March 2008 for $300 million.
The odd thing about the companies listed here is that only one one of them has a business model that is remotely analogous to that of Zappos. That would be Gmarket, the Korean auction and ecommerce site, which was growing revenues and profits at a much more rapid clip than Zappos even. This was true even though Gmarket was a far larger and more mature company at the time of its acquisition by eBay.

The shoe company only managed to post an 8% sales increase in the first quarter of 2009 -- a growth rate that could hardly be considered fast for a young company such as Zappos. In contrast, as late as the fourth quarter of 2008, Gmarket was reporting year-over-year quarterly growth rates of 14%. Keep in mind, too, that Amazon's own gross sales rose by 14% in the most recent quarter, a rate roughly double that of Zappos.

The timing of those earlier deals, likewise, casts some doubt on the valuations. Greenfield was acquired in October 2008, before share prices had completely cratered in tech (although they were on their way down). CNET was acquired in May 2008 when online media company valuations were considerably higher than they are today. And Bill Me Later was also acquired earlier in 2008.

Demonstrating the uncertainty still in the marketplace, the Morgan Stanley analysts surmised that the fair equity value of Zappos could be anywhere from $400 million to $2.8 billion. That's an enormous range. It implies that pegging a fair value on Zappos is akin to throwing darts at a board.

Of course, there's also the fact that Zappos' actual 2008 net sales were only $635 million, well short of the $1 billion-plus levels touted by Zappos (those were actually gross sales, it turns out, with massive returns of merchandise bringing net sales back down by $300 million or so). On a net income basis, Zappos earned a profit of less than 2% of revenues in the last year. Amazon, often noted for having low profits, still managed to post profits just north of 3% in the third quarter, which is a seasonally slow one. So it seems that Amazon is already significantly more profitable than Zappos.

Then there is the cost of free shipping not only on purchases but also returns, a strategy that leaves Zappos with extremely thin profit margins on every order. Amazon may be able to get somewhat better terms than Zappos from shippers to reduce shipping costs but the math never gets good when a single customer orders three sizes of the same shoe and ships back two pairs.

So did Bezos get a good deal or a bad deal? That's pretty hard to tell.

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