William - are you concerned that Amazon now appears to be employing a classic Kleiner Perkins revenue/cash generating model? Here's out it works: Amazon acquires stakes in other companies that are either funded by KP or have received funding from other companies that have either been funded by KP or have some sort of relationship with KP - such stakes are acquired with Amazon stock. This amounts to Amazon exchanging it's own stock for other companies stock. At the same time Amazon receives revenue commitments from these companies.
There are two ways to look at such transactions:
(1) One could argue that Amazon is using it's stock to embark on rapid expansion - a smart strategic move to keep the business growing toward profitability.
(2) One could also argue that such transactions amount to creative financing. Take one of the companies that Amazon has invested in, Greenlight.com. Greenlight is a KP company that has not yet gone public. Amazon, through obtaining some of Greenlight's shares and through obtaining a revenue commitment from Greenlight, is essentially transferring equity financing from Greenlight to Amazon. Here is a list of companies in which Amazon has announced investments over the past month:
Feb 1, 2000
Living.com:
Amazon acquires 18% and warrants for another 9%
Amazon receives $145 million over 5 years
Jan 31, 2000
Audible:
Amazon acquires 5% of the company
Amazon receives $30 million over 5 years
Jan 28, 2000
Drugstore.com:
Amazon ups stake in company to 28%
Amazon receives $105 million over 3 years
Jan 21, 2000
Greenlight.com:
Amazon acquires 5% and warrants for another 25%
Amazon receives $82.5 million over 5 years
I guess I would be more optimistic about Amazon's investments if the above companies were profitable. But I don't believe any of them are. I don't know if you've read The Internet Bubble, by Anthony Perkins and Michael Perkins (the brothers that started Red Herring magazine). In the book, they describe a similar transaction between 3 KP companies, Netscape, Excite and Intuit, that occurred in 1997. At the time, Netscape's stock price was falling, and Excite was trailing as a web portal. Netscape had just launched Netcenter. According to the book, KP arranged a deal among the three companies to help boost Netscape's revenue and to help boost Excites presence in the web portal space. The deal went like this: Excite agreed to pay netscape $70 million over two years - in exchange, Excite would be featured on Netscape's Netcenter home page. At the time, however, Excite had only $9 million in cash. So Excite borrowed the money to do the deal from Intuit - Intuit had to do a debt conversion to raise the cash. Shortly after the deal, Excite did a secondary offering to raise cash to pay Intuit back. One could look at this as a deal that creatively transforred Excite equity capital into Netscape revenue. The result? Netscape started reporting higher revenues - which helped to boost its stock price. Excite reported significantly higher hits to it's site boosting it's position as a viable web portal. And both companies benefitted from the postive PR. One could argue that the strategy helped to give both Netscape and Excite greater valuations for their subsequent acquisitions by other KP companies, AOL (Netscape) and AtHome (Excite) - deals that KP received tremendous financial gains from.
In short, one could argue that these types of transactions represent a key benefit to being part of the KP Keiretsu - that companies in the Keiretsu benefit from economies gained by being closely associated with other companies in the Keiretsu. But one could also argue that the KP uses it's Keiretsu companies to creatively finance each other - through deals that essentially transfer equity capital from one company to revenue for another company. That's essentially what appears to be happening with the companies that Amazon has recently announced deals with.
What do you think - is it smart and strategic? Or is it a surreptitious transfer of cash from one KP Keiretsu company to another in an effort to keep operations going and to bolster stock prices?
-Eric |
