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Technology Stocks : Amazon.com, Inc. (AMZN)
AMZN 249.14+0.3%3:59 PM EST
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To: Bill Harmond who wrote (93454)2/13/2000 7:50:00 PM
From: Eric Wells  Read Replies (2) of 164684
 
What Amazon is trading for those cheap equity stakes is free customer acquisition cost.

William - thanks for your reply. There are a few things that concern me about these recent deals announced by Amazon:

1. Drugstore.com: Before the recent announcement, Amazon already owned 46% of Drugstore.com, and had already established a "strategic alliance" (see press release dated 2/24/99 on Amazon's site). One has to wonder if this most recent strategic alliance represents nothing more than a transfer of $105 million from Drugstore.com's balance sheet to Amazon's balance sheet.

2. I find the Greenlight deal questionable in terms of its strategic importance. Greenlight just launched their site this past November, and currently offers cars in only six metropolitan areas in the US. Their sales, if any, are small. And there is a lot of competition - there are nearly ten high-profile car sites that specialize in selling new cars that are up and running at the moment. In fact, I would not even consider Greenlight to be one of the top car sites - in terms of either sales or popularity. So why did Amazon choose Greenlight for an investment? Was it because Greenlight was a KP company - a private KP company that is certain to go public and be able to raise enough cash to pay Amazon the fees committed to? And why did Greenlight strike this deal with Amazon? Does it really represent a strategic fit? Was this deal done in the best interests of Amazon and Greenlight shareholders?

I think it comes down to two things: Amazon needs more cash to continue operations, and Amazon needs higher, lower-cost revenues in an effort to achieve profitability in order to restore investor confidence. These recent deals give Amazon both (and the recent bond offering gives Amazon more cash). But these deals tax other KP companies - putting pressure on companies that are not profitable themselves. Yet these other companies are in a better position to raise cash through IPOs or secondary offerings than Amazon is. I think an Amazon secondary would not be met well at the moment. So why not do a Drugstore.com secondary and a
Greenlight IPO and funnel some of the proceeds to Amazon?
Of course, this can't go on forever - KP companies that are helping to contiue to fund Amazon will have to become profitable, or else they'll have to look for other sources of funding themselves.

--Eric
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