#Ecommerce, #Business, #M&A, #CorporateFinance, #InvestmentBanking
M&A in the e-commerce industry has generated
substantial buzz lately, with 2017 again seeing the record broken for the
largest e-commerce acquisition of all time. Most notably, Chewy.com, who was acquired by PetSmart for a whopping
$3.35 billion, besting the prior record held by Jet.com when it was
acquired by Walmart for $3.30 billion.
However, not all e-commerce companies have seen the same level
of success, making it crucial to understand industry trends. This article
covers both general mergers and acquisition deal activity and VC investment
trends occurring in the e-commerce sector.
NOTABLE
DEALS
To fully understand the e-commerce space, it is important to be
aware of some of the major transactions, which have had significant impact on
the overall e-commerce environment:
·
Petsmart/Chewy (April 2017) – As mentioned, this has been the largest
ever e-commerce transaction to date ($3.35 billion). It signifies
traditional retailers’ growing interest in the e-commerce model.
·
Walmart/Bonobos, Modcloth,
Moosejaw & ShoeBuy (2017)
– Walmart acquired each of these in 2017 for over $50 million apiece as it
looks to build its online brand presence. Walmart is hoping the strength of
each of these brands will attract buyers to its online store.
·
Walmart/Jet.com (August 2016) – Walmart acquired Jet.com for $3.30 billion in order to have an online
portal where it could sell its major brands.2 This was
notable because it showed the pressure Amazon has put on Walmart to embrace the
e-commerce model.
·
Unilever/Dollar Shave Club (July 2016) – Unilever acquired Dollar Shave Club for $1
billion dollars in order to capture its loyal customers and its high-growth
model. This transaction has been one of the first major subscription box models
to see success.
MAJOR
BUYERS
Many buyers of e-commerce companies are large, established
companies that are seeking to buy out competitors and growth opportunities in
their space. These e-commerce buyers vary greatly in the types of products they
sell and most have only made a limited number of acquisitions within their
individual retail niches.
The one exception to this rule are Walmart, Amazon,
and Alibaba. These companies have dominated the e-commerce space in terms of
total acquisitions made because their strategy depends on being a place where
consumers can buy nearly anything. Walmart alone has made four acquisitions
greater than $50 million this year.
INVESTOR
TRENDS
It can be helpful to break down the e-commerce deal market into
different types of buyers and investors to gain a clearer picture of the
market.
Angels and Seeds
Early-stage investment from
angels and VCs have been shrinking in the e-commerce sector
for the past several years. In 2013, seed and angel deals made up 54% of total
deal share in the space. That amount has fallen to 38% in 2017. This decline
suggests that the industry is coming to maturity.
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Venture Capital
Total VC investment has been strong in 2017. These
have markedly been coming at later points in company’s lifecycle. In 2013,
Series C investment and beyond comprised 23% of total deal share. In 2017, that
amount has risen to 34%. In terms of the number of startup investment deals,
2017 is projected to see 941, which beats last year’s 796, and puts it close to
2015’s 976. The following graph illustrates this point.
PE Funds
Private equity investment has been strong in terms
of deal volume. As brick-and-mortar retailers continue
to struggle, private equity funds have been attracted to the growth and
streamlined approach of e-commerce companies. Pitch book data as of a month ago
shows that while total PE e-commerce deal count this year is slightly below
2015 and 2016, it is already more than 40% higher than in 2013.
Strategic Buyers
Despite several recent high-profile exits, acquisitions
by strategic buyers seem to be slowing down. The industry is also
seeing more consolidation occurring prior to exiting.5 While 2016 saw 150 M&A exits, 2017 may end
up with less than 90. Difficulty exiting has led some well-funded
e-commerce companies to experience down valuations (such as Souq.com and
Flipkart).
VALUATION
METRICS
Some of the most important metrics to know when finding the
value of an e-commerce business are as follows:
·
Price/Sales – This
metric is important for valuing e-commerce companies because many of them
reinvest most of their earnings. This means that an EBITDA or net income
multiple would not be very useful.
·
Revenue Growth Rate –
Faster-growing companies tend to be worth more. Looking at the growth rate over
time can be helpful to see how quickly a company is maturing.
·
Number of Customers –
This is the biggest driver of sales and is key to understanding the scope of a
company’s business.
·
Customer Retention Rate
– Look for this rate to either be flat or decreasing in the best e-commerce
companies.
LARGER
DEAL SIZES
Deal sizes tend to be trending larger as the
industry matures. From 2013 to 2015, there were only two e-commerce deals per
year that surpassed billion-dollar mark. That number jumped to 6 in 2016, and
2017 is close to repeating that.
INTERNATIONAL
E-COMMERCE COMPANIES
China and India are the leaders in terms of the
number of e-commerce companies that have raised over $100 million in funding.
The United States comes in third, with other countries spaced much farther
behind.
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