Borrowed from the Motley Fool web site:
"Great questions so far.
I've got a few issues that I'd like to see addressed:
1. The financing of a internet/high-tech/start-up business like Amazon through junk bonds is highly
irregular. Could you explain the considerations made in choosing that financing path. In addition, please
explain why a secondary stock offering was not made. Given the current value of your stock, a
secondary offering for $300 million at $40/shr would only have diluted the current shareholders by
approximately 15% (not bad considering the 10% interest on the debt).
2. Because of the lack of comparable history for internet companies, or the industry as a whole, I'd like
to make an analogy to another "high-flyer" in recent memory.
In 1980, Donald Burr, an ex-wall street analyst/banker (sounds familiar, doesn't it?) started an airline
named People Express. The airline filled a niche for low-cost travelers and became wildly popular. Yet
as revenues grew, profits shrank:
1983 - Net profit $10M on $287M revenue
1984 - Net profit $2M on $561M revenue
1985 - Net loss of $28M on $977M revenue
1986 - Projected loss of $200M on over $1B revenue (actual loss unknown)
A major part of the losses was related to Don Burr's allowing PE to lose its niche carrier identity. The
growth that occurred with People's route system and fleet in 1984 and 1985 almost seemed to go
unchecked. Fare battles and effective yield management by the "established" carriers took its toll as well
and as People continued to expand it lost market share to the majors.
In the midst of a full fare war with the majors, People Express again defied logic and went on a
spending spree by making several acquisitions and committing to building out of Terminal C at Newark
Int'l Airport. By 1986, People Express had a debt-to-equity ratio of 2.7-1 and outstanding debt of more
than $500 million.
In late-1986, People Express barely averted bankruptcy through the bargain purchase by Texas Air
(who eventually went bankrupt).
This story seems very similar to the short history of Amazon:
- Unbelievable success in a niche (internet book sales)
- Quick expansion into new markets (music CD's & movie videos)
- Intense price wars with the established majors (B&N, Borders, and the other book, music & video
sellers)
- A growth-through-leverage style (as demonstrated by the recent acquisitions and warehouse
expansions)
The question is, why is Amazon's fate any different than People Express? What is currently being done
to avoid the same pitfalls (over expansion beyond the successful niche, over spending funded by debt,
etc.) and what in Amazon's future vision makes this analogy inappropriate?
Sorry about the length, but the background was necessary.
3. What is it like to work for Jeff Bezos? What is his management style? What is the most impressive
thing that he's done so far (beyond the obvious)? Why is Jeff Bezos, who has no significant history as an
entrepreneur or CEO, the man to lead Amazon?
By the way, whether or not these issues are addressed by the CFO, I'd still be interested in hearing the
comments of my fellow Fools.
As a shareholder, I'm becoming very concerned with Bezos' ability to manage this company. The
sophisticated financing is a waring signal to me that this investment banker is more interested in the
financing of the business (like Don Burr) vs. the healthy growth of the business over the long term. I
have a feeling that he's in over his head and needs some seasoned managment types to help grow the
company.
CouchPoDATO" |
